Euro Brinkmanship The Panic before the Storm

Greece has applied to extend its bailout lifeline. But a resolution of the euro crisis is not guaranteed, particularly as Germany is against the move. D-Day will come on Friday with a meeting of euro-zone finance ministers.
Can Greece escape the storm?

The tug of war over Greece and its future in the euro is going down to the wire.

On Wednesday, euro zone officials waited in vain for a letter from Athens applying to extend the country’s bailout loans – its financial lifeline to the world.

Finally, this morning, the Greek government sent the letter, just a day short of the deadline imposed by its European partners. But lenders are still unsure whether the Greeks will actually carry out the austerity cuts and structural reforms that are a precondition for further aid.

Jeroen Dijsselbloem, who chairs the eurogroup of euro-zone finance ministers, tweeted this morning: “Received Greek request for six months extension.”

The response from the European Commission, the E.U.'s executive arm, was described as positive. President Jean-Claude Juncker's assessment was that it "could pave the way for a reasonable compromise in the interest of the financial stability in the euro area as a whole," commission spokesman Margaritis Schinas said.

"The detailed assessment of the letter and the response is now up to the eurogroup," he said. The finance ministers will hold an emergency meeting on Friday at 3 p.m. CET.

However, the reaction from Berlin is far from positive.

German Finance Minister Wolfgang Schäuble's spokesman Martin Jäger said it was "not a substantial proposal for a solution."

He said the Greek request was an attempt at "bridge financing, without meeting the requirements of the program."

Greece needs to agree an extension on its loans from international creditors – primarily the European Union, the European Central Bank and the International Monetary Fund – before its bailout program expires at the end of the month.

The question is whether the Greek proposal will provide enough of a commitment to carry out the tough reforms demanded by its lenders, and Germany in particular. The initial response from Berlin does not bode well.

The last-minute negotiations are taking place as the ECB on Wednesday provided €3.3 billion ($3.75 billion) in extra emergency lending to keep the country's banking system afloat. That is vital, as Greeks are withdrawing their savings at an alarming rate, fearing a return to the drachma.

The best way forward is to extend the existing program with its conditionality. Valdis Dombrovskis, Vice President of the European Commission

If the Greeks fail to reach a deal on the bailout, that emergency funding, known as ELA, will also be cut off.

However, it is not clear if the left-led Greek government is ready to fully meet the ultimatum set down earlier in the week by the other 18 euro zone countries, after talks broke down on Monday at a eurogroup meeting.

Mr. Dijsselbloem had stipulated that Athens has to agree to all of the commitments already made by previous Greek governments in exchange for the €240 billion it has received in loans since 2010.

The Greeks rejected a draft agreement presented by Mr. Dijsselbloem, calling it "absurd."

The Greek prime minister, Alexis Tsipras, and his leftist Syriza party, say they won a democratic mandate in January’s elections to end the austerity that has been imposed by the lenders.

They had said they wanted to apply for an extension to the loan agreement but would not sign up to the full bailout program, which they claim is recessionary and does not offer the country a path toward growth.

Finance Minister Yanis Varoufakis, and Prime Minister Alexis Tsipras in the Greek parliament on Wednesday night.


In particular, Greek finance minister Yanis Varoufakis has rejected pension cuts and an increase in sales taxes.

Greece also wants a rule on its budget surplus to be eased, by allowing it to run a 1.5 percent primary surplus, rather than a target of 4.5 percent.

On Thursday, government officials told Reuters that they have sought an extension to the so-called Master Financial Assistance Facility Agreement, the official name for its loan contract.

That contract stipulates that the loans are dependent on Greece honoring the terms of the so-called Memorandum of Understanding, which sets down the economic reforms the previous government committed to.

However, Athens is looking for terms that would differ from the current bailout obligations, the government official said.

There may be some room for compromise, after all.

The formal extension of that agreement would allow the government to avoid using the phrase “extension of the existing program” and the creditors could avoid using the term “loan agreement.”

I believe the proposal will satisfy the Greek side and the eurogroup president. Yanis Varoufakis, Greek Finance Minister

On Wednesday, Valdis Dombrovskis, vice president of the European Commission, again insisted that Greece had to agree to the conditions associated with the bailout loans.

He said that “the best way forward is to extend the existing program with its conditionality.” Mr. Dombrovskis noted, however, that if Greece wants to substitute some of the existing measures in the memorandum with alternatives, it could do so.

Mr. Varoufakis sounded an optimistic tone. “I believe the proposal will satisfy the Greek side and the eurogroup president,” he said on Wednesday evening.

It remains to be seen if the Greek proposal comes close to bridging the divide between Athens and its European partners.

Meanwhile, analysts at the Fitch credit ratings agency warned that the “continued brinkmanship” could do lasting damage to the Greek economy. They said they were preparing to lower their 2015 forecast for Greek economic growth, which last month they cut by one percentage point to 1.5 percent.

On Wednesday, Mr. Dombrovskis said that there were “worrying tendencies” in Greece, when it comes to the public finances and the banks.

The Greek banks are experiencing what amounts to a silent run.

According to the Bank of Greece, last November private deposits with Greek commercial banks totaled €162.29 billion, or $185.3 billion.

But according to unofficial information from sources in the banking industry, that amount has already declined to €143 billion – a loss of €21 billion. Bank deposit accounts are at their lowest level since the financial crisis erupted in 2009.

Customers are withdrawing €300-500 million a day, say industry officials. Banks are beginning to run out of cash.

Their only remaining refinancing option consists of the ELA loans from the ECB via the Greek Central Bank.

On Wednesday the ECB governing council agreed to extend its emergency funding by €3.3 billion, bringing the total funding available to €68.3 billion.

The emergency loans, which the Greek central bank issued at its own risk, are increasingly controversial, even within the ECB governing council.

Jens Weidmann, the president of Germany's central bank, the Bundesbank, isn’t the only one to point out that the loans are only temporary, and that they can only be paid to banks suffering from short-term liquidity problems. Issuing ELA loans to obviously insolvent banks would be illegal.

Central bankers also note that the Greek banks have been using the money primarily to buy Greek government bonds – bonds with a high risk of default.

Greece Greek gov debt in percent and in billion of euro-01


This is where the ECB is running into a conflict of interest resulting from its dual role in setting monetary policy and supervising banks. Given that the ECB is directly responsible for supervising the biggest Greek banks, it cannot be in its interest that the same banks are filling up on risky sovereign debt.

On the other hand, blocking the ELA loans, which the ECB governing council can achieve with a two-thirds majority, would spell the beginning of the end of Greece's membership in the euro zone.

The ECB could hardly reach such a "momentous decision without political support," say central bank insiders.

Just eight days ago, the central bank expanded the framework for ELA loans by €5 billion, to €65 billion. But even this limit has already been exhausted.

Since Mr. Tsipras’ election win, many Greeks feel insecure and are worried that the country could leave the euro zone. That could happen if the government runs out of funds and is forced to print money to pay salaries, pension benefits and its bills.

"I don't want to wake up one morning with drachmas in my account," said 62-year-old Petros in Athens. He didn't want to give his last name because he now has €40,000 stashed away in his apartment.

He withdrew the funds last week. "It was surprisingly easy," the retiree told Handelsblatt. He had to wait for an hour until the time lock on the safe was open, but then he received his money.

It doesn’t always go that quickly, with banks often trying to stall customers. Those who wish to withdraw larger sums are often asked to "consult" with the branch manager. Still, customers can have their money if they want it.

A sophisticated logistics system ensures that neither branches nor cash dispensers run out of cash. "If that happened, we could see a panic very quickly," one banker said.

Still, officials in Brussels and in central banking circles are now discussing whether capital controls might be necessary, such as limiting transfers to accounts abroad, so as to slow down the steady draining of deposit accounts.

Bank insiders estimate that a fifth of the money withdrawn to date has been sent abroad. Most of these funds belong to companies and were transferred to foreign banks or branches of Greek banks in London, Cyprus and Luxembourg.

About 30 percent of the money was invested in securities, especially in pension funds. Experts estimate that half of the withdrawn money is being kept as cash in safe deposit boxes, private safes, drawers and other hiding places – that in turn has led to a rash of burglaries in Greece.


Ruth Berschens is chief of Handelsblatt’s Brussels bureau. Gerd Höhler is the paper’s Athens correspondent. Jens Münchrath heads coverage of monetary policy and economics from Düsseldorf. Siobhán Dowling, an editor at Handelsblatt Global Edition, contributed to this report. To contact the authors: [email protected], [email protected], [email protected].