By Forbes, Laurie Laird
The latest round of last-ditch talks on a funding deal for Greece broke down in acrimony on Monday night, with Finance Minister Yanis Varoufakis refusing the demands of his European partners to extend a bailout agreement.
In Monday’s edition of the New York Times, Varoufakis wrote of his determination “to clash with mighty vested interests in order to reboot Greece.” By that measure, his latest foray into the lion’s den of the European Commission building could be considered a whopping success.
The new hard-left Greek government swept into office on promises to roll back austerity measures adopted by its predecessor as a condition of loans to keep the nation afloat. Crowds have amassed outside the parliament building in Athens – previously the scene of sometimes-violent anti-austerity protests – to show their support for the new leadership.
However, Varoufakis held out hope that a deal might be struck in the days to come.
“I have no doubt that within the next 48 hours, Europe is going to come together … and we shall find the phrasing that is necessary so that we can submit [an agreement] and we can move on to doing the real work which is necessary to establish common ground,” he told reporters, following the inconclusive meeting.
Varoufakis has requested a series of bridging loans to tide Greece over while he negotiates a new financing programme with his European partners, a stance that German Finance Minister Wolfgang Schäuble has described as “irresponsible.”
However, many economists have expressed sympathy with the Greek position, given the dramatic shrinkage of the country’s budget, in line with the conditions set by international lenders. Greece is now running a structural budget surplus of more than 7% of gross domestic product, well above the 4% excess achieved by Germany, pointed out Mike Ingram, an analyst at BGC Partners BGCP +1.02%, a brokerage in London. “That tells you that the domestic economy has been overly depressed by the fiscal frontloading,” he said.
European leaders had described Monday’s meeting as the last possible date in which a package could be agreed before the February 28th expiration of the current bailout programme, as a number of national governments must ratify any changes to Greek funding arrangements.
However, a meeting of the governing council of the European Central Bank on Wednesday may be the real make-or-break moment for Greece. The inner circle of policy makers could decide to revoke Greek access to the Emergency Liquidity Assistance, a main source of funding since the ECB ceased to accept Greek debt as collateral for lending earlier this month.
The ELA facility is available on a short-term basis, and only to banks considered “solvent” by the ECB. In the absence of a longer-term funding programme for Greece, policy makers may not regard Greek banks as stable enough to receive ELA assistance.
The euro dipped briefly on the news of the collapse in negotiations between Greece and its key creditors, but markets may be failing to price in the risk of a restructuring of the euro. “The markets are sleepwalking through a Grexit,” said Ingram.