The Greek extension disaster

Actually I had intended to write a different post but just now Germany has rejected a letter from Greek finance minister Yanis Varoufakis that looked to extend the Greek bailout loan. The German rejection changes the complexion of negotiations. I still believe a deal gets done though. My thoughts follow below.

Jeroen Dijsselbleom, the Dutch finance minister who is the current leader of the Eurogroup of finance ministers, has said a deal to extend the current bailout must be reached this week. Today the Greek finance minister tabled a proposal for such an extension. The extension accepted the legality of the current loan framework while using language to still carve out a way to support Greek aims on alleviating what the Greek government calls a humanitarian crisis. The Greek proposal was flatly rejected by the German finance ministry, however. And this rejection has thrown negotiations into turmoil. 

The salient points from the Greek proposal are the following:

The Greek authorities recognise that the procedures agreed by the previous governments were interrupted by the recent presidential and general elections and that, as a result, several of the technical arrangements have been invalidated. The Greek authorities honour Greece’s financial obligations to all its creditors as well as state our intention to cooperate with our partners in order to avert technical impediments in the context of the Master Facility Agreement which we recognise as binding vis-a-vis its financial and procedural content.

In this context, the Greek authorities are now applying for the extension of the Master Financial Assistance Facility Agreement for a period of six months from its termination during which period we shall proceed jointly, and making best use of given flexibility in the current arrangement, toward its successful conclusion and review on the basis of the proposals of, on the one hand, the Greek government and, on the other, the institutions.

Greece has basically called for a 6-month loan extension that would make it eligible for the ECB’s quantitative easing program in July under certain pre-conditions. In essence, the proposal tabled by Varoufakis is designed to give Greece access to quantitative easing without having to submit to a new bailout agreement. This access to QE may be what is behind Germany’s rejection of the Greek proposal.

In any event, we have a Eurogroup meeting tomorrow. And as it stands now, we do not yet have the basis for negotiation, at least according to the German finance ministry. However, I will say this: If Dijsselbloem, as Eurogroup chair, calls a meeting, it is clear he believes the Varoufakis letter is a strong basis for negotiation. Germany’s rejection of the letter as a basis for negotiation puts Germany at odds with the Eurogroup chair at a minimum. Until other finance ministers also say whether the Varoufakis letter is a strong basis for negotiation, we can’t know if Germany is isolated. More to come