Eurogroup’s failed compromise leaves Greece in limbo

Greece went into last Monday’s Eurogroup hoping for the conclusion of the second review, a disbursal of the next bailout tranche, an agreement on debt relief and a path to the European Central Bank’s quantitative easing (QE) scheme, paving the way for a return to the bond markets and an exit from the adjustment program. As ambitious as the targets were, to emerge with only one of these items on offer from its lenders was an immense disappointment for the government.

What we can gather from the unofficial minutes of the meeting in Brussels published by financial news website Euro2day is that Eurogroup President Jeroen Dijsselbloem presented the eurozone finance ministers and the International Monetary Fund’s representative, Poul Thomsen, with a draft statement. We do not know the content of this document but it appears to have set out growth assumptions, fiscal targets and a menu of debt relief measures for the coming decades. One of those appears to have been a proposal to extend the maturities of Greek loans by up to 15 years.

The proposal, though, did not garner the approval of either of the key players in the discussion: the IMF and Germany. Thomsen, the director of the Fund’s European Department, suggested the offer fell short of what the Washington-based organization feels is necessary to ensure Greece’s debt is put on a sustainable path.

“We are not there yet,” Thomsen told the Eurogroup, according to the leaked document. He said something “considerably more specific” would be needed for the IMF board to be able to agree to participation in the Greek program with funding.

On the other side of the table, German Finance Minister Wolfgang Schaeuble said that the draft statement went “well beyond” what had been agreed at the Eurogroup in May 2016, when a set of debt relief measures were outlined, with finance ministers agreeing then that they would be implemented “if necessary.” Schaeuble added that agreeing on anything outside of the contours of last year’s deal would require a new mandate from German Parliament, which he indicated is a non-starter. “I have no mandate, if this is the way, then good luck,” he reportedly said on Monday. “We will not find a solution.”

One can imagine the dread felt by Greek Finance Minister Euclid Tsakalotos when he heard these comments. Last October, he likened Greece to a gazelle being trapped between two fighting elephants (Germany and the IMF) and here he was last Monday, trying to find a way to avoid being trampled.

The leaked minutes show Tsakalotos expressing his disappointment, pointing out that Greece has adopted the measures the IMF demanded at substantial political cost and now feels it deserves to have the uncertainty surrounding its future lifted. “Investment is the reason why the economy is stagnating and to change that we need to give a signal to the markets that Europe is not kicking the can down the road again,” he told his counterparts during the meeting.

Tsakalotos’s cause for concern only grew bigger during the Eurogroup because the disagreement over the draft statement led to lengthy talks and a suggestion aimed at ensuring the night did not end in an impasse: The IMF would recommend to its board that it back Greece’s program, allowing the next loan tranche to be released, but would hold back on lending any money itself until the debt issue is settled.

The thinking behind this proposal was that Germany would not have to engage in any debt discussions in the build-up to its national elections in September, the IMF could avoid an embarrassing head-on clash with one of its key members and Greece could get the funding it needs to ensure that it can meet debt payments of 6.5 billion euros in July, avoiding any concerns about a potential default.

However, this option would leave Greece with the absolute minimum it was expecting from the meeting. Athens had been repeatedly assured over the last few months that agreeing to the measures demanded by the IMF, which was more skeptical than the European lenders about Greece’s growth potential and its ability to produce large primary surpluses, would lead to the Fund insisting the debt relief issue is cleared up now or it would turn its back on the Greek program.

The compromise presented to Tsakalotos last Monday cast out of the window much of what had been taken as a given. “[I] always understood that for you to go to the board you would need to have debt that is sustainable, so I don’t understand this new possibility,” the Greek minister reportedly told Thomsen. “But if it is a possibility, it is the worst of all worlds for Greece.”

Tsakalotos argued that if Athens signed off on a deal that did not include the IMF declaring itself content that Greek debt will be made sustainable, the markets would not have the clarity they are looking for. This, in the Greek minister’s view, would stifle efforts to attract investment and prevent the government easing its way back into the international bond markets, an effort it hoped to launch this summer.

The compromise offered at the meeting in Brussels would also obliterate the positive narrative used by Prime Minister Alexis Tsipras to convince his party and MPs to support the unpopular package of fiscal measures and reforms passed through Parliament earlier this month. It was the realization of this narrative, which saw Greece moving through the gears of review conclusion, debt relief, QE, bond issue, growth and program exit, that Tsipras hoped would win back support for his beleaguered government. That is why Tsakalotos reportedly told his counterparts that there would be a “major political crisis” in Greece if he accepted the compromise.

This, in brief, is why last Monday’s Eurogroup ended in what Schaeuble described as “failure.” He identified the problem as being caused by others cultivating expectations that the meeting could provide clarity on Greece’s future. If there is something that we have learnt over the years it is that Eurogroup meetings rarely provide clarity for Greece and tend to push the problem into the future. But the walls are closing in and the next meeting on June 15 needs to arrive at a decision or Athens will not be able to meet its debt commitments the next month. Dijsselbloem said that the next few days will be about “creating additional options or adjusting expectations.” Greece is hoping it will be the former but it may be forced to accept the latter.