BAILOUT In Greek Bailout Stalemate, Politicians Play the Blame Game

An ongoing stalemate regarding Greece’s bailout is once again becoming a serious burden for the country’s banks and businesses. Athens is demanding compromise from its creditors, led by Germany, but attacks on its own central bank may be playing into Berlin's hands.
A homeless man takes shelter outside the Bank of Greece in Athens. Photo: REUTERS/Yannis Behrakis

Recently, it seems that hardly a day goes by without Greek central bank head Yannis Stournaras publicly expressing some form of alarm regarding the future of Greece’s €86-billion bailout package, its third such rescue deal since 2010.

Mr. Stournaras, who served as finance minister during the country's previous administration, has warned that delays in the government’s latest round of talks with European creditors could lead to a “serious setback” for the country’s economy. It is crucial, he has said, that the talks are concluded “without delay” in order to “dispel the uncertainty” that has burdened the Greek economy for months.

The warnings were aimed at Alexis Tsipras, the Greek prime minister and leader of the left wing Syriza party. Mr. Tsipras reacted frostily, saying through a spokesperson that “independent institutions” can give their assessment but should not “politicize” matters. Going one step further, Vice Premier Yannis Dragasakis, one of Mr. Tsipras’s closest advisors, made what amounted to a direct threat to both Mr. Stournaras and his bank, saying that if the head of the central bank fails to fulfill his duties, the country faces an “institutional problem.”

The central bank isn't the only institution sparring with Mr. Tsipras and warning that Greece's economic crisis, long the stuff of nightmares for Europe's politicians, could soon come roaring back. Germany, Europe's largest economy and Greece's major creditor, is once again on the front line as well.

Since entering office at the end of January 2015, Greek prime minister Alexis Tsipras has been at odds with his head of the Greek central bank.

When it comes to discussions surrounding instituting reforms in Greece, Germany has long played a key role, having shaped the E.U.’s hard-line take on Greek austerity measures in exchange for bailout funds. And these days, when the going gets tough in Greece, the blame is often shifted northward.

With the central bank breathing down his neck, Mr. Tsipras has in turn accused Germany of slowing down the negotiations. Berlin, he says, is refusing to compromise on the reforms Athens needs to get its hands on the next round of bailout cash. Mr. Tsipras, for his part, is wary of pushing further reforms through parliament, where his left-wing coalition government has a razor-thin majority with just 153 of 300 seats.

For Athens and Berlin, the clock is ticking to break the impasse. Athens will need some €6 billion by July at the latest in order to pay off the latest capital and interest payments on the country’s enormous public debt. The payment of these further bailout funds from the E.U. is dependent on the passage of reform measures.

German Finance Minister Wolfgang Schäuble, like Mr. Stournaras, has called for Greece to honor its promises in order to continue to receive funding from the bailout package, and so far has managed to hold his tough-love alliance against Athens together. In this sense, the government’s latest attacks on Mr. Stournaras may well play into Germany's hands.

According to insiders, Mr. Stournaras has the full backing of Mario Draghi, the president of the European Central Bank. The ECB is one of four creditor institutions which have been wrangling with Athens for months in an attempt to conclude the second audit round of the country’s latest aid program. Germany's Mr. Schäuble and the ECB's Mr. Draghi don't agree all too often, but Mr. Tsipras's blame game seems to have pushed them into alignment on Greece. Berlin has also sought to keep on its side the International Monetary Fund, the Washington-based emergency lender that is also a Greek creditor. The IMF in turn has insisted on Greek labor reforms as a condition of their involvement.

Yet not all is well in Germany's hard-line alliance. Like the split between the Greek prime minister and his central bank chief, German politicians in recent weeks have begun to do their own sparring over the right approach to Greek austerity.

In contrast, German Foreign Minister Sigmar Gabriel, following a meeting in Athens with Mr. Tsipras on March 22, has called for a more relaxed view to Greek reform and even suggested an increase in German spending to both Greece and the European Union.

Mr. Schäuble’s response the next day was swift and unambiguous: "I was annoyed that while in Greece Mr. Gabriel sent a message to the Greeks that won't help them, but rather make it more difficult for them to make the right decisions," Mr. Schäuble told German news radio station Deutschlandfunk in an interview on March 23. "This message, which stands in opposition to every agreement we've made in Europe together over the last 10 years – not to mention with every Greek administration – goes in the wrong direction."

Bank deposits are at their lowest level for 16 years, with steady shrinkage since early 2017.

The current round of negotiations were scheduled to conclude a year ago, but Prime Minister Tsipras has delayed implementing reform measures agreed with Germany at the conclusion of the third Greek bailout in the summer of 2015. In particular, he has resisted implementing establishing more flexible arrangements in the labor market and changes to strike and pay-bargaining law, as well as measures to open the energy market, which are now years overdue.

Whatever the outcome of the second audit, the current stalemate has proved not only a point of contention for German and Greek politicians, but also a burden to Greece's economy. This month, the government cut its growth forecasts for 2017 from 2.7 to 2.5 percent. The central bank is predicting a figure of just 1.9 percent. Weaker growth puts budget targets at risk, possibly requiring new cutbacks, which in turn slow growth.

For many, the current situation is reminiscent of the early months of 2015 when Mr. Tsipras’s confrontation course, as well as Germany’s unwillingness to compromise, drove the country close to bankruptcy, with the banking system verging on collapse. At the time, economists, particularly in the U.K. and U.S., viewed Germany’s rigid stance critically. Two years later, amid a growing wave of global populism, it would seem even more is on the line should Greece be forced out of the euro zone.

Today, Greek banks are again among the main victims. While three of the four systemically significant Greek banks managed a return to profitability this year, market leader Piraeus Bank showed a marginal loss of €4 million ($4.27 million) compared to last year's €1.85 billion ($1.97 billion). The bank’s continued lack of profitability is mainly attributable to provisions for bad debts, which amounted to €1.04 billion.

At the announcement of the bank’s figures, Piraeus’s deputy chief executive, George Poulopoulos, spoke of “negative headwinds in the early months of 2017,” an oblique reference to the sluggish negotiation process.

Additionally, concerned bank customers have been withdrawing increasing amounts of money. Greek's slow bank run has led to a steady shrinkage of deposits since the beginning of 2017. Now, deposits are at a 16-year low. The result is that the Greek banks have had to turn to the emergency liquidity assistance organized by the central bank. Credits for Greek companies are equally in short supply – not to mention expensive.

It's the precarious state of Greece's financial system that has Mr. Stournaras sounding the alarm. His exchange with Mr. Tsipras marked the re-emergence of a longstanding conflict between the central bank chief and the left-wing populist leader. And while the power struggles rage, the clock is ticking.


Gerd Höhler is a Handelsblatt correspondent based in Athens, Greece. A.J. Samuels is an editor at Handelsblatt Global in Berlin and also contributed to this story. To contact the authors: [email protected], [email protected]