Bloomberg) -- It took a few simple truths from Germany’s
Angela Merkel on the basics of euro-area crisis management to
pacify the combative new government in Athens.
The chancellor explained to Greek Prime Minister Alexis Tsipras what an aide in her office called reality. There wasn’t much time to reach the deal needed to keep Greece afloat and Germany wasn’t going to budge, Merkel told him in a 50-minute phone conversation on Feb. 19. It was their first substantive exchange since he’d won election Jan. 25.
Tsipras tweeted that they forged an interest “in finding a mutually beneficial solution.” The next day, finance ministers struck a provisional deal in Brussels to keep aid flowing.
In office for a month, Tsipras and his finance minister,
Yanis Varoufakis, have largely shelved the promises that got
them elected, irritated key euro-area collaborators and stoked
doubt about their intentions. In return, they got a four-month
bailout extension and the certainty they’ll be back at the edge
of the financial abyss before the first half of 2015 is over.
“They were amateurs, but they are adapting,” said Theodore Pelagidis, a senior fellow at the Brookings Institution and a professor at the University of Piraeus in Athens. “The negotiation showed that Greece had no leverage.”
For all the political fireworks, investors counted on Tsipras bowing to that fact. Greek 10-year bond yields closed at 9.1 percent the day after his election. The day of the Feb. 20 agreement, they were 9.9 percent.
The change of government kicked off urgent negotiations because the bailout agreement -- which mainly demanded budget cuts and improved governance in exchange for loans -- was due to expire on Feb. 28. Greece was isolated even by traditional allies including Cyprus, according to two officials involved who asked not to be named because the talks were private.
In the meantime, Greece’s new leaders were “educated” to appreciate the stakes, Ilmars Rimsevics, Latvia’s central bank governor and an European Central Bank Governing Council member, told his local television on Feb. 24.
The learning curve was apparent from their first days in office. Tsipras was forced to issue a statement in his first week promising Greece would pay its bills. That came a day after Varoufakis rattled markets by declaring his willingness to walk away from aid rather than submit to more austerity.
With an untucked shirt and no tie, Varoufakis came across more like an academic than a politician, the officials said. They recall him running everything past Tsipras by phone as the negotiations unfolded.
When finance ministers’ talks broke down in Brussels on Feb. 16, Varoufakis termed the euro area’s proposal to extend existing bailout commitments “absurd” and “unacceptable.”
Tsipras’s call to Merkel set the stage an agreement.
“The cost of this long quarrel has been huge,” Pelagidis said. “Billions in deposits fled banks, corporations halted their activity, growth came to a halt. This sudden stop will cost dearly.”
Varoufakis, an Athens University professor whose expertise is game theory, had a vision for what should happen in the euro region and hasn’t been shy about sharing it in talks, officials said.
Varoufakis “has more rock-star qualities than I have,” Irish Finance Minister Michael Noonan said at an event at Bloomberg in London on Wednesday. “He is a modern man; he is obviously very clever, very able.”
His philosophy is that Greece doesn’t just have a liquidity problem, it has a solvency problem that can only be fixed by growth and not austerity, said Monojit Chatterji, 64, Varoufakis’s doctorate supervisor.
As talks deteriorated in the run-up to the 11th hour agreement, there were no figures and no commitments and people stopped listening, an official said.
After securing approval from euro peers for his plans to collect more tax, consolidate pension funds and maintain state-asset sales, Tsipras declared victory against austerity. He now must keep onside his party faithful.
For Varoufakis, the next watershed is already on the horizon. Greece has until April to hone the details of its measures. It can’t access more bailout funds, including the next tranche of about 7 billion euros, unless it passes the review. It also needs to raise money before next month to repay the International Monetary Fund.
“I’m pretty confident we won’t have a cash-flow problem, because we all struggled very hard through long hours of discussions with our partners, with institutions to come to this stage,” Varoufakis said in a Feb. 25 interview in Athens.
Still, the skepticism remains.
“Now the question is whether one can trust the assurances of the Greek government or not,” German Finance Minister Wolfgang Schaeuble told SWR2 radio Wednesday. “One must understand that there are many doubts in Germany.”
To contact the reporters on this story: Nikos Chrysoloras in Athens at nchrysoloras@bloomberg.net; Rodney Jefferson in Athens at r.jefferson@bloomberg.net
To contact the editors responsible for this story: Heather Harris at hharris5@bloomberg.net James Hertling, Ben Sills
The chancellor explained to Greek Prime Minister Alexis Tsipras what an aide in her office called reality. There wasn’t much time to reach the deal needed to keep Greece afloat and Germany wasn’t going to budge, Merkel told him in a 50-minute phone conversation on Feb. 19. It was their first substantive exchange since he’d won election Jan. 25.
Tsipras tweeted that they forged an interest “in finding a mutually beneficial solution.” The next day, finance ministers struck a provisional deal in Brussels to keep aid flowing.
“They were amateurs, but they are adapting,” said Theodore Pelagidis, a senior fellow at the Brookings Institution and a professor at the University of Piraeus in Athens. “The negotiation showed that Greece had no leverage.”
For all the political fireworks, investors counted on Tsipras bowing to that fact. Greek 10-year bond yields closed at 9.1 percent the day after his election. The day of the Feb. 20 agreement, they were 9.9 percent.
Cut Adrift
The election of Tsipras, whose campaign pledged an end to austerity and the return of decision-making to Athens, opened a new chapter in a saga that goes back to 2010. That’s when Greece became the first euro country to get an international bailout. The fallout eventually threatened a breakup of the 19-nation euro zone. Five years and as many prime ministers later, the economy has shrunk by about a quarter and its unemployment rate is about 25 percent.The change of government kicked off urgent negotiations because the bailout agreement -- which mainly demanded budget cuts and improved governance in exchange for loans -- was due to expire on Feb. 28. Greece was isolated even by traditional allies including Cyprus, according to two officials involved who asked not to be named because the talks were private.
In the meantime, Greece’s new leaders were “educated” to appreciate the stakes, Ilmars Rimsevics, Latvia’s central bank governor and an European Central Bank Governing Council member, told his local television on Feb. 24.
The learning curve was apparent from their first days in office. Tsipras was forced to issue a statement in his first week promising Greece would pay its bills. That came a day after Varoufakis rattled markets by declaring his willingness to walk away from aid rather than submit to more austerity.
Greek U-Turn
While Greece had already abandoned demands for a debt writedown, last week’s U-turn pushed back the timetable for raising the minimum wage and compromised on freeing the country from creditor institutions.With an untucked shirt and no tie, Varoufakis came across more like an academic than a politician, the officials said. They recall him running everything past Tsipras by phone as the negotiations unfolded.
When finance ministers’ talks broke down in Brussels on Feb. 16, Varoufakis termed the euro area’s proposal to extend existing bailout commitments “absurd” and “unacceptable.”
Tsipras’s call to Merkel set the stage an agreement.
“The cost of this long quarrel has been huge,” Pelagidis said. “Billions in deposits fled banks, corporations halted their activity, growth came to a halt. This sudden stop will cost dearly.”
Bank Deposits
About 700 million euros ($796 million) of bank deposits returned to Greece on Tuesday after a deal to keep aid on track was ratified, Varoufakis said. That’s just a fraction of the 16 billion euros -- 10 percent of the total -- that fled in December and January. There’s a risk of a new recession and tax collection is below target.Varoufakis, an Athens University professor whose expertise is game theory, had a vision for what should happen in the euro region and hasn’t been shy about sharing it in talks, officials said.
Varoufakis “has more rock-star qualities than I have,” Irish Finance Minister Michael Noonan said at an event at Bloomberg in London on Wednesday. “He is a modern man; he is obviously very clever, very able.”
His philosophy is that Greece doesn’t just have a liquidity problem, it has a solvency problem that can only be fixed by growth and not austerity, said Monojit Chatterji, 64, Varoufakis’s doctorate supervisor.
D-Day
“I said to him, ‘this is where we learn whether what we’ve talked about for the last 30 years is true or false,’” Chatterji said in an interview before the talks. “It’s D-day. There’s no place to hide. He’s outside in the open now.”As talks deteriorated in the run-up to the 11th hour agreement, there were no figures and no commitments and people stopped listening, an official said.
After securing approval from euro peers for his plans to collect more tax, consolidate pension funds and maintain state-asset sales, Tsipras declared victory against austerity. He now must keep onside his party faithful.
For Varoufakis, the next watershed is already on the horizon. Greece has until April to hone the details of its measures. It can’t access more bailout funds, including the next tranche of about 7 billion euros, unless it passes the review. It also needs to raise money before next month to repay the International Monetary Fund.
“I’m pretty confident we won’t have a cash-flow problem, because we all struggled very hard through long hours of discussions with our partners, with institutions to come to this stage,” Varoufakis said in a Feb. 25 interview in Athens.
Still, the skepticism remains.
“Now the question is whether one can trust the assurances of the Greek government or not,” German Finance Minister Wolfgang Schaeuble told SWR2 radio Wednesday. “One must understand that there are many doubts in Germany.”
To contact the reporters on this story: Nikos Chrysoloras in Athens at nchrysoloras@bloomberg.net; Rodney Jefferson in Athens at r.jefferson@bloomberg.net
To contact the editors responsible for this story: Heather Harris at hharris5@bloomberg.net James Hertling, Ben Sills
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