(James Saft is a Reuters columnist. The opinions expressed are his own)
By James Saft
Feb 12 (Reuters) - Successful resolution of the Greek euro fracas may depend on the players’ ability to scare the right people in the right measure.
This is no simple task, leaving much room for accidental disaster.
The Greek government and troika are working hard to scare the wits out of one another, the object of which is to obtain the best politically acceptable terms given their varying constituencies. Greece first talks of war reparations and insolvency, then, reportedly, steps back slightly to more nuanced views of reduced budget surpluses and limited privatization. The ECB first fires warnings about ongoing financing, then ties ongoing access to financing to emergency assistance to the solvency of the banks using it, a point somewhat undermined by the self-admitted insolvency of the state which ultimately backs them.
All of this is consistent with the idea that we have technocrats bickering over who will suffer what economic and political pain. On this view even Greek Finance Minister Yanis Varoufakis’ swashbuckling, erratic style is presented as a negotiating tactic, a ruse intended to cow his opposite numbers.
Don’t be confused, this is where the main action is and the ability of the main parties to work together to reach a compromise is the main hinge on which events will turn.
The risk, of course, is that two other big constituencies, Greek taxpayers and those who deposit money or otherwise lend it to Greek banks, are watching the proceedings and working through the implications for their narrow interests. They too have reason to be scared and they too have reason to act in line with their beliefs.
What depositors and taxpayers don’t have is a seat at the table, they only have feet with which they can move their money from one place to another. This won’t be the main determinant of what become of Greece and the euro, but it could play an important complicating role.
However you view events, the possibility of a default by Greece, potentially accompanied by a euro exit, can’t be excluded.
“That something has to be done to avoid an uncontrolled default, a rather scary state of affairs in its own right, is apparent from the level of tension among the finance ministers and the urgent pace of the negotiations,” economist Carl Weinberg of High Frequency Economics wrote to clients.
“A default by Greece is imminent, and we are not sure that the extent of the damages to the euro zone financial system are containable.”
This makes the slump in Greek tax takings in January, announced on Thursday, worrying. Tax revenues fell 23 percent below budget at 3.49 billion euros. While much of this may have been due to uncertainty in the run-up to the elections which returned a Syriza-led government, one can hardly say certainty has since prevailed.
The implication is that Greek taxpayers, never a compliant lot, may feel that it behooves them to pile up what cash they can.
This puts pressure on both the Greek government and the troika, but also has about it the whiff of a run, a phenomenon which could, if unchecked, be self-fulfilling. It also removes negotiating room between Greece and its partners, as one of the main points at issue is what size primary surplus Greece should run. The hope, surely, was that spending might rise to alleviate distress, rather than takings should fall.
The other issue is the funding of Greek banks. While clearly dependent on access to extraordinary official funding, the behavior of depositors could also play a role.
The European Central Bank’s Governing Council extended a support program for Greek banks for another week by authorizing the Greek central bank to commit an extra five billion euros in emergency lending assistance (ELA). The council will next review the program on Feb. 18, though it can act at any time.
ELA funds cover depositor outflows, which were about 12 billion euros in January, not far off the peak monthly outflow from May 2011 at the peak of the first part of the Greek crisis.
It may take the withdrawal of the ECB backstop to bring on a banking collapse but there is no rule forcing depositors to wait for that to happen. It is hard to argue that the interest rates on offer give much compensation for the risk, however small, that capital controls are put into place, as they were in Cyprus, or, worse for depositors, that they wake up some day with new drachmae where once were euros.
A rush of withdrawals in an attempt to front-run capital controls or euro exit would complicate negotiations and might prompt self-destructive decisions by either side.
Great events get covered at the negotiating tables but they are not always settled there. (At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at email@example.com and find more columns at blogs.reuters.com/james-saft) (Editing by James Dalgleish)