There’s a scene in the 1974 Mel Brooks movie “Blazing Saddles” where the besieged sheriff points a gun at his own head and threatens to shoot himself if the townspeople threatening to kill him don’t back off. “Listen to him, men, he’s just crazy enough to do it!” calls one vigilante, as the sheriff effectively kidnaps himself and escapes. I’m starting to think that the Greek government has been attempting a similar tactic since its election in January, albeit with less success.
The gun Athens pointed at itself was the threat of default. Moreover, it seemed to think that other countries were standing close enough for a suicide bullet to traverse Greece and then snuff out Portugal, then Spain, then Italy. It turns out, though, that the denizens of euroland don’t much care whether Greece pulls the default trigger, and — rightly or wrongly — aren’t that worried about the potential consequences.
But if Greece’s threats are mostly empty, its creditors’ are all too real. And it’s starting to become clear which of those creditors is liable to lose its patience first.
Greece has lost 2 percentage points of anticipated growth in just three months, according to the European Commission’s latest forecasts published on Tuesday. The nation’s economy will expand by just 0.5 percent this year, after the EC slashed the 2.5 percent prediction it made in February. A country that’s barely growing but has debts equal to 180 percent of its gross domestic product is a country that will struggle to meet its obligations.
Thus far, the European Central Bank has been Greece’s most cantankerous creditor. It’s on the hook for about 110 billion euros ($123 billion), and has been grudgingly increasing its support for the Greek banking system in recent months through its Emergency Liquidity Assistance program:
As ECB officials have said, though, there comes a point when emergency liquidity becomes a misnomer for propping up insolvent banks. And that’s against the rules — hence the ECB’s growing discomfort.
The International Monetary Fund, though, has similar strictures about not propping up failing states that don’t have a credible recovery plan. And the Financial Times reported Monday that it might demand that creditors in the euro zone write off what the newspaper called a “significant” part of what they’re owed, before it throws good money after bad by supplying its half of the 7.2 billion euros of aid that Greece is trying to unlock.
A Greek government official told Bloomberg reporter Eleni Chrepa on Tuesday that there’s a schism between the IMF and the European Union that makes compromise impossible, given their incompatible reform demands. It’s hard to say whether that news worsened a rout in European government bonds, or if too-low yields rather than fears of Grexit precipitated the stampede out of Spanish, Italian and other euro-denominated debt markets. But Portugal’s 10-year borrowing cost soared to almost 2.4 percent from 2.1 percent. If that move is a precursor to what Grexit might mean for European bonds, heaven help any investor who lent money to Spain for a decade in March for just 1.15 percent in yield.
More than three months after the current round of negotiations began, there’s still no convincing evidence of a deal between Greece and its creditors. The ECB will probably keep sending cash Greece’s way until its political masters say to turn off the spigot. Probably. The IMF, though, has just that bit more independence than the ECB in deciding when enough is enough. If, as the FT story suggests, the IMF has run out of patience, the end could be in sight — and it won’t be pretty.