In memory of Dr. Andreas Höfert

How Greece divides and (maybe) conquer

| Posted by: Andreas Höfert | Tags: Follow UBS, Andreas Höfert

It is said that humor dies last, even after hope. If this is true, then resolving the Greek crisis seems to have become a hopeless endeavor. Indeed, Jean-Claude Juncker, president of the European Commission, usually never at a loss for a joke, was most grave before the G7 meeting and implicitly accused his “friend,” Greek Prime Minister Alexis Tsipras, of having lied to him.

Last Saturday Juncker reportedly declined to take a phone call from Greece because “there was nothing to discuss.” Greece denied later that this phone call ever took place – yet another illustration that instead of serious negotiations we now have a “he-said-she-said” situation. Nonetheless it would be wrong to take every piece of news coming from Greece and its creditors at face value. “When it becomes serious, you have to lie,” is, after all, a notable Juncker quote. Disentangling truthful elements from background noise and tactics is therefore difficult.

What we do know is that the Greek drama is in its final act. As we said in an editorial four weeks ago, Greece is running out of cash. It will be unable to meet its next big payments to creditors unless it gets foreign help again. On 5 June, the country was supposed to pay EUR 310m to the International Monetary Fund (IMF) as a first tranche of a EUR 1.6bn debt reimbursement. Greece appealed to pay back everything at the end of June, pushing back once again the famous “deadline.” Zambia is the only other country to ever have used this option, back in 1980.

So 30 June is now the new deadline (after 24 February, 30 March, 24 April, 11 May and 5 June). But as we also learned last weekend from Juncker, even this deadline isn’t fixed in stone, because, “I said that there is a deadline. But I did not say when.”

Greece was supposed to deliver a “comprehensive” reform proposal at each deadline – but never did. Two weeks ago, Bloomberg reported that the Greek government finally began drafting a plan. “One wonders what the Greek authorities have done for the last five months,” remarked my colleague Paul Donovan, global economist at UBS Investment Bank. Indeed. Then again, letting the crisis run its course until frustration frazzled its creditors might have been a Greek ploy.

A couple of months ago, Greece obtained a concession by means of a semantic glitch. Greek creditors would no longer be called “the troika,” but instead “the institutions.” Back then this was derided, but in hindsight it showed Machiavellian deft. Troika, despite encompassing three, is a singular word, while "institutions" is plural. The latter shows Greece’s creditors as multiple, sometimes divided in voice and interests. Ergo, divide them and conquer.

Lately the gap between the IMF and the European institutions has become obvious. The IMF wants to restructure the Greek debt and bring it back to sustainable levels. Greece is also seeking this now, as a precondition for reforms. But at this stage, restructuring Greece’s debt is a no go for the Europeans – at least until reforms have been agreed – because it would open Pandora’s box: other peripheral Eurozone countries could demand similar treatment. Moreover, it would make the losses for European taxpayers effective, a political nightmare for all those in power who assured that taxpayer money was never at risk in Greece.

The wrestling match between Greece and its creditors has now morphed into a ménage-à-trois. Greece may think this arrangement delightful, but the anti-climax of the crisis may not inspire us.