Greek PM Tsipras takes a small step back from the brink

Greek prime minister Alexis Tsipras has taken a tiny step back from the precipace of the "Grexit" and placed negotiations on the Greek debt crisis on slightly more solid footing.  Finance Minister Yanis Varoufakis told the Financial Times that the government was dropping its demand that half of its $315-billion debt be forgiven.  Instead, they have come up with a plan to replace existing loans with a series of "debt swaps."

By doing so, Tsipras has already broken one of his major campaign promises: to reduce the crushing debt burden on Greece by getting other nations to forgive its debt.  Now it appears that Greece wants the European Central Bank to wave a magic wand and create financial instruments that would have the ECB funding its debt and deficit.

Not.  Going.  To.  Happen.


Varoufakis said the bulk of the country’s official debts should be transformed into bonds linked to nominal GDP growth, ensuring that the country only pays back when it can afford to.

In addition, he said that Greek government bonds currently held by the European Central Bank should be replaced by “perpetual bonds”, removing the need for big redemption payments over the next couple of years, freeing up more government resources.

“There will be a deal within a very short time that makes it perfectly clear to everyone that Greece can play within the rules, and in a way that will put away the crisis once and for all,” Varoufakis told the U.K.’s Channel 4 news late Monday.

The proposals do put Greece back on the right side of the red line drawn by Germany and other Eurozone creditors, who have refused point blank to accept any “haircut” on their claims.

But they ask impossible concessions from the ECB. First, it’s hard to see Frankfurt agreeing to hold Greek bonds forever in return for what is likely to be a minimal interest payment. The Greeks can argue that the ECB has already effectively suspended the law on it not lending to governments with its new quantitative easing program, but the Greek plan would expand and set in stone forever emergency privileges that Greece has enjoyed at the ECB for the last three years.

The ECB still holds around €25 billion worth of Greek debt, people familiar with the situation say. It has another €120 billion or so in bonds from Italy, Spain, Ireland and Portugal, who would also love to be spared ever repaying them. The ECB also lends about €50 billion to Greek banks through its regular operations, despite the fact that those banks have virtually no investment-grade collateral to offer.

But Athens wants more. The newspaper Kathimerini reported that Varoufakis wants to increase the government’s borrowing through short-term Treasury bills (capped by the bailout agreement to €15 billion) to €25 billion. As these bills are routinely bought by Greek banks and immediately deposited at the ECB as collateral for more loans, it’s to all practical purposes direct funding of the government’s deficit by the ECB.

The challenge facing the EU is to give Tsipras some leeway so that he remains politically viable but hold Greece to its obligations.  The ECB has already developed a new monitoring system, replacing the hated "Troika" (ECB, IMF, and the European Commission).  This small political concession to Tsipras signals that the EC is prepared to go to some lengths in order to keep Greece in the euro zone.

Judging by the Greek proposals for debt relief, it doesn't appear that Tsipras and his Syriza party are anywhere close to accepting reality.  They still believe that the EC owes them, as evidenced by this:

And just in case there was any doubt as to how the Syriza party really sees the role of the Frankfurt-based central bank, Giorgios Katrougalos, vice minister of the interior, told the German newspaper Bild-Zeitung that “The ECB should initiate the redistribution (of wealth) and start printing money.”

There is rising sentiment in the rest of Europe to allow Greece to exit and try and contain the damage.  As of now, that's still better than a 50-50 chance.  Eventually, Tsipras and the EC will find that neither one can offer more concessions without either Tsipras betraying his coalition or the EC unable to compromise Greek creditors.  That's when the real showdown will occur, and the chasm will open up beneath their feet.

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