The chances of the deal agreed between Greece and the ‘Institutions’ actually being enforced seem low – this is, by no means, over writes James Meadway

The deal agreed between Greece and the “Institutions”, its creditors, late on Sunday is shockingly bad. It represents something close to abject surrender on the promises Syriza made when elected back in January. Austerity is to be extended and deepened, taxes on consumption hiked, “reforms” to pensions introduced. On the latter, despite some mythology, 45% of Greek pensioners live in poverty, whilst the economic situation in the country has become so bad that for many households, a pensioner represents the only stable income available. Every “red line” the government had has been broken.

This is significantly worse than the deal offered by its creditors prior to the referendum nearly two weeks ago, whatever brave faces Alexis Tsipras may be trying to put on it. Moreover, it is combined with two punitive conditions, more appropriate to a nation defeated in war than a deal constructed by “partners”. First is that Greece, to ensure its good behavior, must deposit €50bn of assets in a special fund. These will be forfeited and handed over to the creditors should Greece break the terms of the deal. Second, Greece’s legislation will now be subjected to monitoring by observers, appointed by the creditors, to ensure it is holding to the strict conditions assumed. The terms of the deal state that the Greek government must “agree with the Institutions on all draft legislation in relevant areas with adequate time before submitting it for public consultation or to Parliament.” It is small wonder that former finance minister, Yanis Varoufakis, has compared this to a second Versailles Treaty, which imposed punitive conditions on Germany after WW1. Deutsche Bank have described the deal as “barely stopping short of demanding Greece become a vassal state of Brussels.”

For this, in return, Greece got next to nothing but a notional euro membership. Banks remain closed. Bailout sums have not been signed off. And there is only the vaguest hint of a (crucial) debt write-off in the future.

A trap of its own making

The descent from the high expectations raised by its election in January has been precipitous. But fundamentally, Syriza was trapped by its own position. It promised two things: an end to austerity, and continued euro membership. The so-called “bailouts” since 2010 had been a costly failure, in which money loaned by European states was used not to pay Greece, but for Greece to pay off its creditors. Over 90% of the €252bn loans made in successive bailouts has gone to creditors. This was never a “Greek bailout”, but a bailout principally of private banks – largely based in Germany and France.

As a result of the bailout schemes, however, Greece’s burden of debt both grew, and shifted. Private institutions that had recklessly loaned the Greek state money during the credit-boom years of the euro were off the hook. The risk of a second banking failure was diminished. Instead, other euro member states stepped in with loans. The result has been to remove the immediate economic risk, and replace it with a political one, since any write-off of Greek debt – essential to restore anything like stability – will hit those states that assisted with the bailout.

This was the situation that confronted the new government as Yanis Varoufakis, freshly installed at the Ministry of Finance, set off to negotiate in the apparently sincere belief that a good deal for all was achievable. Since austerity had failed and Greece’s government debt was now unpayable, reasonable people would agree to end austerity and discuss writing off the debt. Alas, as Varoufakis now ruefully says, it rapidly became clear that he and Syriza were not dealing with reasonable people. Moreover, Greece’s negotiating position was fundamentally undermined by two factors: the willingness of creditors, led by Wolfgang Schauble, the hardline German finance minister, to contemplate Grexit, thus depriving Greece of a potential bargaining chip; and, on the other side, the failure of the Greek banking system.

The last point proved decisive throughout. Greek banks are insolvent, and have been for some time. Because the economy is failing, more than one-third of the loans they have made are non-performing. Because people believe the economy is failing, the rate of withdrawals from the Greek banking system has been consistently high for the last few years – people don’t believe their money is safe. And because the government is itself insolvent, but Greek banks hold many government loans, there is no chance of it acting as an effective backstop against failure.

As a result, the Greek banking system has relied on support from the European Central Bank (ECB) for the last few years. But this created an enormous vulnerability. In mid-February, the ECB took the decision to bar Greek banks from using Greek government debt as collateral for access to ECB financing. This announcement immediately turned the heavy rate of withdrawal from Greek banks into something of a run, with withdrawals approaching 1bn a day. You can see what a dramatic effect this, plus the pre-election withdrawals, had on Greek deposits on the graph below:

This forced the Greek side’s hand. At that rate of withdrawal, the Greek government would be forced to introduce capital controls – bank closures and restrictions on deposit withdrawal – or face outright bank failure and an exit from the euro. Varoufakis and his team felt they had little choice but to agree to a temporary, five-month bailout extension, including an extension of austerity measures. Greek banks were, by this stage, dependent on Emergency Liquidity Assistance (ELA) support from the ECB. Over the summer, the limits to this support have been lifted successively

The ECB pulled the same trick again, once Greece had failed to pay the International Monetary Fund (IMF) at the end of June. With negotiations stalled, Alexis Tsipras announced, a few days later, a referendum for Sunday, 5 July on the terms the creditors had presented earlier in the week. The response of the ECB was immediate: citing the unwillingness of the government to agree to the creditors’ programme, the Bank pulled its ELA support. This compelled the Greek government to enforce an extended (and, at the time of writing) bank holiday, and impose withdrawal limits of €60 a day. The result in Greece has been the steady disintegration of the monetary economy: since no-one will want to use the banks, the payments system has dried up, hitting importers in particular hard. Greece’s debt position, meanwhile, has spiraled still further, with a leaked IMF report suggesting Greek debt will now peak at 200% of GDP in a few years time – up from an (already high) 177% a few years back.

At every point, the ECB has found some technical justification for its actions, citing the Greek government’s apparent unwillingness to comply with its creditors’ demands. But these are spurious: the decision is nakedly political, as is made clear by the offer of ECB support to banking systems outside the Eurozone, in Bulgaria and potentially other Balkan nations, where Greek banks own major subsidiaries. And, in complete defiance of its remit as a central bank – an institution created fundamentally to protect its banks – it has deliberately collapsed one banking system, but now offers (at its discretion) support to others beyond its immediate remit. The ECB is a political actor, like any other. Democracy is being subverted by an unaccountable and secretive power at the heart of Europe.

It could retain that power for as long as Syriza, in its majority, remained committed to euro membership. A minority has long argued that, since Greece’s euro membership is unsustainable, preparations for a controlled exit must be put in place. In a lengthy interview, Yanis Varoufakis claims he warned of an impending bank closure, brought about by the ECB, and asked to make preparations for at least temporary measures to mitigate this. Since this could easily have led Greece all the more rapidly to euro exit, these were turned down by the Cabinet.

The write-off

There is no serious question that Greece’s debt is unpayable under any plausible circumstances. Syriza has argued this throughout and, shortly before the referendum, received a boost for their case when a leaked IMF report made clear that the Fund broadly agreed with them, against the hardline creditor nations, led by Germany. Even with exceptional austerity, and (frankly) implausible assumptions about future economic growth, Greece required a write-off. The offer made to the creditors should have been clear: either accept a (smaller) write-down of Greek debt now, with the implied loss, or face a catastrophic loss in the future when Greece defaults entirely, and leaves the Eurozone. (I’ve labeled this before as the choice between “Uruguay” and “Argentina”.)

This remains anathema to the hardliners in the eurozone. All claim that they cannot allow taxpayers in their own countries to pay for Greek “irresponsibility”, but are (seemingly) prepared to risk a bigger future loss. The underlying reasons vary. For Eastern Europe, the perception that (comparatively wealthy) Greece has been given an easier ride than themselves is jarring, and there may also be the calculation that holding out now will win themselves greater concessions in the future. As a share of GDP, the notional losses to Slovakia and Estonia will be about double those of Germany. For southern Europe and Ireland, where governments are threatened by anti-austerity parties, the logic is more blunt: if Syriza wins concessions, Podemos in Spain or Sinn Fein in Ireland, or the collection of anti-austerity parties in Portugal, will all be boosted. Syriza has to fail, and has to be seen to fail, graphically. Syriza displaced a social democratic party, Pasok, to win power. Europe’s centre-left must see it fail, or they could follow suit. Elsewhere, notably Finland, radical nationalist parties, opposed to the European project, are insisting on making no concessions. Coalition partner True Finns have threatened to bring down the new Finnish government if a write-off is agreed.

Germany, the largest creditor, is the most complex case. Finance minister Schauble and his advisors have been open in their belief that for Greece, as the Khmer Rouge used to say, “to keep you is no advantage; to lose you is no hardship”. German proposals, leaked before the final deal, suggested that a “temporary exit” from the eurozone might be one option. (This was of course nonsense: once you are out, you are out. Who would let Greece back in?) The majority partner in the coalition government, the CDU/CSU, would certainly object to any debt write-off on any meaningful scale, potentially splitting and forcing Angela Merkel to rely heavily on coalition partner SPD votes to get through the Federal Parliament. The SPD, for their part, have become some of Merkel’s biggest cheerleaders. At the centre of the row is an issue of discipline: not so much for Greece, but for other euro members, tempted down the Syriza path. By making life so unbearable in Greece, no country will (hopefully) ever again consider breaking the rules – or even suggesting they might be changed, as Syriza did. Varoufakis has even suggested German hardliners wish to ensure France observes proper fiscal discipline in future, and certainly the deal agreed is a long way from the softer line earlier favoured by France and Italy. It’s also possible Merkel may hope to persuade her hardliners she means business by extracting a punitive retreat from Syriza, and cashing this in against a future debt write-off.

Stalemate and Grexit

The result for now, one way or another, is a stalemate on the critical issue. Far from acting in concert for the general good, the eurozone member states appear to be retreating rapidly to their own national interests. Without a very substantial debt write-down, the chances of Greece remaining in the eurozone over even the next few years drop close to zero. The country will be permanently unable to meet the payments due, requiring successive rounds of “bailouts”, its banks will remain insolvent, and the steady disappearance of euros from circulation will force substitutes for currencies into use – as is already reportedly already happening, with some companies issuing “scrip” in lieu of money wages. Over the longer term, since its euro membership implies Greece adopts the position of permanent debtor, successive rounds of “internal devaluation” – forced reductions in earnings – will be required to maintain any sort of competitiveness. One way or another, exit is approaching. Either this process is controlled and managed, with minimal further damage to Greek society, paving the way for a full recovery. Or it is uncontrolled and damaging, making a recovery harder to achieve, at best.

A further leaked report from the IMF, now published on their site, but apparently one seen by the other creditors argued even more strongly for a debt write-off. Heavy pressure is being applied on the European refuseniks from an aghast Washington, where appetite for a messy break-up of the eurozone is somewhat limited. Russia, it was announced last week, has signed major gas pipeline deal with the Greek government, allowing it to bypass Ukraine when tapping into European markets, although otherwise Putin’s government has (whilst making vaguely sympathetic noises) been outwardly careful not to become involved.

At the time of writing, the Greek Parliament is due to vote on the measures, following the timetable imposed by the Institutions. Syriza is deeply divided on the issue, with Left Platform MPs threatening to vote against the measure. This would force the government to rely on votes from the centre-left and centre-right and, notionally, turn neo-Nazi Golden Dawn into the official Parliamentary opposition. Greek trade unions have called a 24hr general strike for today. A campaign for euro exit is reportedly gearing up. The chances, meanwhile, of the deal actually being enforced – from the asset transfer to the pension cuts to the spending squeeze – seem low, given the appalling damage five years of austerity has already inflicted. This is, by no means, over.