February 26, 2012 6:17 am
‘Greece 2: Revenge!’ – the plot thickens
By John Dizard
Now that “Greece”, this season’s big heist movie, is in the can and on the way to the distributor, the producers are sitting around the pool on the exclusive French Caribbean island of St. Barthélemy, working on the sequel, which starts shooting this summer.
As usual, the problem is how to get the audience back for more of the same: meetings convening and breaking up, riots, opposing talking heads, stock shots of the Parthenon. The answer, I believe, is to leak out that the franchise is still fresh, with great plot twists. Also, several lead characters (civil service unions, state enterprises, and pensioners) from “Greece” face horrible fates in the sequel, including slow starvation.
The key to understanding the story arc of the sequel is the one real success of the negotiators for the private sector lenders to Greece: getting pari passu (equal status) treatment for the payments on their new paper with that held by the European Financial Stability Facility, the official lender of the euro group. The term of art is “the escrow account”.
When, as is likely, the Greek government fails the first major test of its commitments under the restructuring deal, the bondholders and EFSF can be paid, out of the same escrow account, by the same fiscal agent, even as cash for the state is cut.
This is what I’ve heard about the current screenplay for “Greece 2: Revenge!”: fast forward past the close of the current deal, to the setting of the date for Greece’s next parliamentary elections. There was hope among some of the current cabinet members, especially the Pasok (socialist party) people, that those could be put off till next year, perhaps even up to the final deadline of next October. Now that doesn’t look as likely, so let’s say that we get elections by late April, after the signatures on the papers have dried.
Here’s a plot twist: key decisionmakers at the multilateral lenders, leading core Europe politicians, and even bankers, now want the Greek public to elect a rabidly anti-“German”, anti-troika coalition government. Ideally, rabidly leftwing, but even a rabidly nationalist anti-troika coalition will do. That would accomplish two goals of the internationals: forcing a break-up of the ossified Greek parties and their “clients”, and manoeuvring the left and nationalists to take the blame for the post-hard-default cuts.
While the Greek state has to meet specific monthly performance criteria, starting next month, the first really significant review is carried out by the troika, in particular an International Monetary Fund team, in June. No one doubts there will be significant “slippage” in meeting fiscal targets and carrying out structural reforms. That will be reported no later than July.
Nothing surprising so far. The markets have been conditioned to expect that Greek non-compliance will be answered by a wagging finger and another wire transfer. In the script I’ve seen, that doesn’t happen this time. Instead, the new Greek government will be told to get back in compliance with budgets and reforms, on a schedule that even a Nordic country couldn’t meet.
The script says those demands are met, of course, with fist-shaking defiance by the Greeks. This time, though, the troika cuts funding for the Greek state, and continues to pay the debt service into the escrow account. In particular, the September and March interest payments for the new private sector Greek bonds are covered. Since we are now in high summer, there isn’t an immediate shortage of euros for the country, as the tourists are spending their convertible currency. But capital controls, ready for the Greek clearing and settlement system since last September, are imposed. Greek deposits are fenced in.
The Greek government would not meet all its domestic obligations, such as supplemental pensions and much of its civil service pay and benefits. The shortfalls are covered by un-expatriatable deposits or scrip. Foreigners are blamed.
In the meantime, the eurosystem central banks would have put all the software and procedures in place for intra-euro area capital controls. Just temporary controls justified by public policy, public security and prudential supervision.
The scrip issued by the Greek state piles up, and trades around. A market price is established for it, say around 50 or 60 cents on the euro. People in the tourism and export sectors gain at the expense of state employees, beneficiaries, and domestic creditors. The trade and government primary deficits close, at the expense of living standards.
After months, or even a year of this bread and water diet, the Greek public and political leaders come around to the idea of getting back on track with the performance criteria. By then, they have decided whether they want to drachma-tise, and inflate away the primary budget deficit, or formally exchange the scrip for its deflated value in euros.
Then a cosmetically amended bail-out deal is reaffirmed.
Cut. Fade to black. Credits.