Brinkmanship on hold, for now

It feels like we’ve been here before. Crisis summits at the end of which both sides declare victory followed, just days later, by another crisis summit.

On Friday night (20 February), the Greek government effectively secured itself a short-term stay of execution. No more and no less. Prime minister Alexis Tsipras has to spell out a precise list of reforms by Monday evening (23 February), which will be evaluated by its creditors who will decide whether Athens gets four months to renegotiate its bailout.

The brinkmanship is far from over.

To secure the four months, Tsipras and finance minister Yanis Varoufakis had to swallow a couple of bitter pills.

The statement issued by the Eurogroup following Friday’s meeting makes it clear that “the Greek authorities commit to refrain from any rollback of measures and unilateral changes to the policies and structural reforms that would negatively impact fiscal targets, economic recovery or financial stability, as assessed by the institutions".

In other words, policies cancelling planned privatisations and increasing wages and pensions are on hold.

But Varoufakis has interpreted this to mean that if his treasury can raise the money to neutralise any extra spending or welfare provisions, it will be allowed to do so. “We are going to write our own script on the reforms that need to be enacted,” he said

This looks likely to take the form of taxation on the wealthiest Greeks, notorious for avoiding tax, and a crackdown on illegally smuggled cigarettes and petrol. Media reports on Sunday suggested that Syriza expects to raise €7.3 billion from these levies.

Greece also had to abandon plans to use €10.8 billion in leftover European bank support funds it had earmarked for the Greek economy.

There are already signs that factions within Syriza are reluctant to agree to the compromises that will inevitably be needed to strike a deal with its EU creditors. Commenting on Friday night’s agreement, Manolis Glezos, a Syriza MEP and 92 year-old Second world war veteran, complained that it was an “illusion”.

“Renaming the troika to the ‘institutions’, the memorandum to ‘agreement’ and the creditors to ‘partners’ is like renaming meat as fish and it doesn’t change the previous situation,” he said, adding that “there can be no compromise... between a slave and a conqueror.”

However, bridging the gap between Greece and Germany remains the stiffest task.

True to form and mindful of his own domestic audience, German finance minister Wolfgang Schaueble noted that Tsipras and Varoufakis “certainly will have a difficult time explaining the deal to their voters”.

Capital controls

Another question is whether the Greek government should impose some form of capital controls as part of an agreement.

Hans Werner Sinn, President of the IFO institute in Munich, is among a number of economists who argue that the Greek government should be required to implement capital controls to keep its banks solvent.

ECB statistics reveal that Greek bank deposits have collapsed from around €150 billion in early 2012 - when the country was already deep in crisis - to around €50 billion at the end of 2014.

In December 2014 alone a net €7.6 billion, equivalent to 4.1 percent of Greek GDP, was transferred abroad, and similar sums have probably been withdrawn since then, after nearly two months of renewed uncertainty.

As a result, the government is reliant on the European Central Bank continuing to provide emergency funding, money which is simply replacing funds which depositors are moving out of Greece.

The lesson from Cyprus, which became the first eurozone country to impose restrictions on money being brought in and out of the island in 2013, is a salutary one.

Former president of the Cypriot central bank, Panicos Demetriades, admitted back in 2013 that the insolvency of Laiki Bank had merely been delayed by the emergency credit from the ECB, hinting that imposing capital controls earlier might have prevented the collapse of the lender.

The controls are still in place two years on, but a repeat in Greece might be necessary to keep their bankrupts from insolvency.

High stakes

After three years of relative calm, Syriza’s first month in power has put ‘Grexit’ back in the economic vernacular. The latest round of high-stakes brinkmanship has pushed the country closer to the eurozone’s exit door than it has been since its €240 billion bailout was finalised in early 2012.

But in truth, leaving the euro would not magically transform Greece’s economic fortunes, neither is it what most Greeks want. That is why both sides need to strike a deal.

It is fair to say that Varoufakis and Tsipras blinked first on Friday. But this game of high-stakes poker has only just started.