Saturday, January 31, 2015

Here Comes the Greek Default

Greece will probably default on a roughly €740m payment due to the International Monetary Fund on Feb. 12, judging from the strident positions the new government has taken and a deeply disturbing connection between the ruling coalition’s junior party and the darkest corner of the Putin regime.

Taken together, the news this week dashed whatever hopes there were that Greece’s victorious radical leftists would see sense and cooperate with official creditors. Although the government can almost certainly afford to make the February payment, it can’t afford to pay the more than €16b due to official creditors this year unless they agree to roll it over into new loans. Given how little hope there is of reaching such a deal, the new government will probably stop paying immediately.

Two signals came on Friday. Yanis Varoufakis, the new finance minister, said the new government would refuse to meet with functionaries sent by official creditors to Athens to monitor implementation of Greece’s “adjustment program.” He said the new government would instead insist on high-level talks with European politicians to reach a new and completely different agreement. Varoufakis, a leftist economics professor, has been writing in his personal blog for years that Greece should default and insist on a large write-down of its debts.

Meanwhile Alexis Tsipras, the leader of the victorious Syriza party and the new prime minister, acted on a campaign pledge to end privatizations by sacking the head of the privatization agency. Since the latest version of the adjustment program expected privatization revenues would cover €2.2b of this year’s financing needs (see Table 11), the sacking was a clear message to foreign creditors to expect less repayment than planned.

But it’s the revelations about two ministers in the new Greek government that make a deal with Europe almost impossible. A Russian ultranationalist’s hacked emails, which garnered little attention when they were leaked to the internet in November, show that the new defense minister, Panos Kammenos, traveled to Moscow in October as a guest of Konstantin Malofeyev, a Russian oligarch under US and EU sanctions for his deep involvement in Russia’s war in Ukraine.

Although ostensibly an independent private businessman, Malofeyev has worked closely with Russian covert operations agencies to organize and finance the war. Igor Girkin, the Russian covert operations officer who led the Russian forces in east Ukraine until last August, professed to be a volunteer who recently left a job as head of security for Malofeyev.

Malofeyev and Girkin also worked together behind the scenes of the annexation of Crimea. Malofeyev has been accused of making his fortune by ripping off a big Russian state bank and misallocating French insurer Axa’s investment in his “private equity fund,” Marshall Capital.

Malofeyev also funds a creepy ultranationalist movement led by Alexander Dugin, who calls openly on his Facebook page for a genocide to be carried out in Ukraine. A prominent figure in Syriza, Nikos Kotzias, invited Dugin to speak at a conference in Athens in 2013, where Dugin urged Greeks to form a pro-Russian lobby within the EU. It looks like Dugin got his wish: Kammenos and Kotzias are now defense minister and foreign minister, respectively. Any future attempts by the EU or Nato to try to pressure Russia to stop attacking Ukraine will likely be vetoed by the new Greek government.

The Bulgarian journalist-blogger Christo Grozev has done a great job of tracing Kammenos’ trip by matching references in the leaked emails to a published interview of Malofeyev. Kammenos traveled as part of a big, fat Greek wedding party that Malofeyev brought to Russia because he couldn’t go to Greece. Grozev however misidentified the hotel where the wedding was held: it was Marshall Capital’s Tsargrad resort hotel outside Moscow.

Kammenos was listed among the wedding attendees in an email between two Malofeyev associates, and Kammenos’ trip to Moscow was mentioned in an email to one of them by a minor character in Syriza, Dimitris Konstantakopoulos. A pro-Russian journalist who cooperates closely with Dugin and Malofeyev’s organization, he gave the impression Kammenos stayed a long time in Russia, claiming the now-defense minister “disappeared off the face of the earth in a most impressive way.”

Syriza is a diverse umbrella coalition of many parties and organizations, some of which are practically parties of one man. There’s no evidence that Tsipras or Syriza generally are strongly pro-Russian. But as long as Kammenos and Kotzias are holding their current positions, the rest of Europe has every reason to want the Syriza government to fail. The United States, which has a crucial say over IMF lending, is unlikely to support any relaxation of conditions for this coalition.

The IMF tentatively agreed with the previous Greek government to roll over €7.2b of the €9.8b of its loans that come due this year (including interest), but that’s just not going to happen with the government flouting the loan conditions and the defense and foreign minister playing the role of Russia’s fifth column within Europe. Greece needs another €10b or more on top of that to make all its debt payments this year. It was a pretty safe bet that the EU would have rolled that €10b over if the former government had been re-elected. Now that looks extremely unlikely.

As I wrote previously, Greece’s financial position is not as strong as some have suggested. Greece ran a primary budget surplus of 0.7% of GDP in 2014, but that’s likely to deteriorate this year as Syriza tries to make good on populist campaign pledges and as households and businesses prepare for the worst by hiding money from the tax collector and moving it abroad. The most likely result of Greece’s rebellion against the austerity imposed by creditors will be worse austerity imposed by the absence of creditors.

In July and August, Greece is due to repay nearly €7.5b to the European Central Bank and Euro Area national central banks. As the organization that controls the Greek central bank and facilitates international bank transfers of euros, the ECB has considerable power over Greece. The ECB could use that power to make life so miserable for Greece that it will have to decide between getting back on an adjustment program or quitting the euro.

But I don’t expect to see Greece leave the euro. Polls consistently show strong support among Greeks for staying in the euro and almost no support for quitting. Syriza clearly promised to stay in the euro and would not have won had it been even a little bit shifty on that question. More likely, support for Syriza will quickly erode until it becomes unable to govern.

(UPDATE: For what it’s worth, “Greece will repay its debts to the European Central Bank and the International Monetary Fund and reach a deal ‘soon’ with the euro-area nations that funded most of the country’s financial rescue, Tsipras said in a statement e-mailed to Bloomberg News on Saturday.” Note that this is a paraphrase and the actual statement might have been less categorical. I suppose it shows that Tsipras understood by Saturday that the signals he and Varoufakis sent on Friday could undermine his own state finances. It may mean that Tsipras will go ahead and make the Feb. 12 payment to give time for negotiations. We’ll see.)

(UPDATE #2: For details of Greece’s 2015 debt payment schedule, see my more recent post.)

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