Europe Solidaire Sans Frontières
It is crucial to thoroughly analyse the policy implemented by the Varoufakis-Tsipras government because, for the first time in the 21st century, a radical left-wing government was elected in Europe. If we want to avoid another disaster, it is absolutely vital to identify the flaws and understand what went wrong.
This critique of the Greek government’s policy in 2015 is not primarily meant to point out the respective responsibilities of Tsipras or Varoufakis as individuals. It is imperative to analyse the politico-economic orientation that was followed, so that we can ascertain the causes of failure, understand what could have been tried instead, and learn what a radical left-wing government can do in a country in the periphery of the Eurozone.
This section will take a look at the Tsipras government’s early days, during which Yanis Varoufakis pursued his negotiation tactics with the European creditors. We will find out that this strategy was ill-fated because Varoufakis was committed to avoiding a confrontation with the ECB, which was bent on smothering Greece starting from February 4. His position on key issues such as debt went against Syriza’s programme, but that was not enough to earn it the support of European policymakers, who refused to make concessions to a government which was too radical in their eyes.
The early phase of the new Tsipras government
The Troika was going to financially asphyxiate the upcoming government led by Syriza
Varoufakis says that during the electoral campaign’s last phase, Alexis Tsipras received a message from Jörg Asmussen, [2] an adviser to the leaders of the SPD, a member of the coalition government led by Angela Merkel. Asmussen offered to help a prospective Syriza government in the forthcoming negotiations with the European institutions. He suggested extending the current Memorandum so that the government could buy some time to continue the reforms stipulated by the Troika before signing a new deal.
Jörg Asmussen recommended a collaboration between the Tsipras team and Thomas Wieser (Austrian Social Democrat), who was (and still is) a key player in the Eurogroup and was seen as a potential ally of the Greek government during its upcoming negotiations. A written note from Thomas Wieser was attached to Jorg Asmussen’s email. It informed Tsipras and Varoufakis as to what Wieser believed, namely that the ECB had no plans to pay what it owed Greece - that is, reimbursement of profits the Bank made on the Greek securities it held. This contradicted the ECB’s assurances of 2012. [3] The amount owed but never remitted to Greece was nearly €2 billion, which is a considerable sum for such a small country. This was equivalent to the estimated cost of implementing the humanitarian measures Syriza had promised (see Text Box: Excerpts from the Thessaloniki Programme). Unofficially, they also came to know that the Troika was not going to disburse the sums pledged in the second Memorandum, which expired on February 28, 2015. The IMF and EFSF were supposed to make these payments before the Memorandum’s deadline. [4] Thus, the warning was loud and clear: the Troika was going to financially asphyxiate the upcoming government led by Syriza.
In this document received before the elections, Thomas Wieser indicated that the opportunity to extend the second Memorandum for an indefinite period must be seized.
In his reply, Varoufakis insisted that the ECB must pay what it owed to Greece - that is, the profits it had made from the Greek securities it held.
At the same time, Varoufakis agreed that the prospect of extending the Memorandum beyond February 28 was crucial.
Then everything happened very fast. Syriza swept the January 25 elections and the Syriza - ANEL government took office on January 27.
Varoufakis does not bother to describe how the government was composed. He highlights a few issues that concern him directly. He indicates that his first hurdle concerned Alexis Tsipras. Varoufakis wanted his allies, Euclid Tsakalotos [5] and George Stathakis, [6] to hold posts “in a ministry linked to economic policy,” but Tsipras had decided to appoint Panagiotis Lafazanis to one of those two posts. Lafazanis, one of the main leaders of the Left Platform within Syriza, supported the unilateral suspension of debt repayments and held a “pro-Grexit position.” Varoufakis writes: “Alexis had appointed Panayiotis Lafazanis to the ministry (of Productive Reconstruction). This was terrible.” Then he continues: “With Lafazanis in one of the key ministries, and with Euclid - who agreed with our covenant - outside the cabinet, my negotiation strategy was in jeopardy.” [7] According to Varoufakis, Tsipras refused to dismiss Lafazanis, arguing: “I need Lafazanis inside the cabinet and in an economic ministry to prevent him from pissing in from the outside. If I strip him of it now, on the night before our swearing-in, he will turn even more against me than he already is. The Left Platform will be up in arms.” [8]
Let me remind you that Lafazanis opposed the capitulation of July 2015, resigned as minister, voted against the third Memorandum as an MP, and left Syriza with around twenty MPs and many activists to form Popular Unity, a new political party.
Finally, Varoufakis convinced Tsipras to appoint Tsakalotos as Alternate Minister in charge of economic matters within the Ministry of Foreign Affairs, so that he could participate in all the negotiations with the policymakers and be on all the trips to Brussels.
This brings us to what he calls the “war cabinet” (apparently, Tsipras and others who were part of it also used the same term), that is to say the circle of ministers and officials directly involved in Tsipras’s strategy. Varoufakis says the following regarding the war cabinet: “When its members were in Greece, rather than in Brussels or elsewhere, the war cabinet met daily. It comprised Alexis, Deputy Prime Minister Dragasakis, Alexis’s alter ego Nikos Pappas, myself, Euclid and Sagias, the cabinet secretary. Often we were joined by Chouliarakis, chair of the Council of Economic Advisers, Stathakis, the economy minister, and Gabriel Sakellaridis, the government’s spokesperson.” [9]
Varoufakis’s first days as minister
Varoufakis explains that in his first three days in office he buckled down to organizing his ministry, putting his team of collaborators to work, estimating the liquidity available to the government for servicing the debt and running the State apparatus (payment of pensions and civil servants’ salaries etc.) He was told that it would take “Anything between eleven days and five weeks” to settle the last issue.
Varoufakis also explains that the Troika had already debilitated his ministry immensely: three areas under his jurisdiction were partially off-limits to the minister - the department in charge of the recapitalization of private banks (the Hellenic Financial Stability Fund or HFSF), the department responsible for privatization (the Hellenic Republic Asset Development Fund or HRADF), and the administration for tax collections, headed by a CEO from the private sector.
Varoufakis realized on 30 January that Dragasakis and Tsipras had decided to further deplete his ministry by withdrawing his jurisdiction over the banks. While Tsipras, Pappas and Dragasakis accepted his proposal of asking the European creditors to take over the Greek banks, [10] he says, Varoufakis admits in his book that this project was abandoned from the beginning of his tenure. This is his story:
"The last item on our agenda that night was Greece’s banks. I asked for ideas on how to approach the impending confrontation when I put my proposal for ’europeanizing’ them to the EU. Wassily (Kafouros) [11] interrupted me in typical fashion:
| ’The horses have bolted, Yani,’ he said, showing me a decree that had arrived that evening from the deputy prime minister’s office, fully authorized by the cabinet secretary. It stipulated that jurisdiction over all matters pertaining to the banks had been moved from the Ministry of Finance to the office of the deputy prime minister. ’Don’t tell me I didn’t tell you so,’ said Wassily. ’Dragasakis has taken his banker friends under his wing to protect them from the likes of you.’ |
Fearing that Wassily might be right, I still had no choice but to give Dragasakis the benefit of the doubt." [12]
As I have shown very clearly in the first part of this series, this proposal to hand over the banks to the European creditors went against the Greek people’s interests. This was one of Varoufakis’s six sine qua non conditions for agreeing to become finance minister. It is extraordinary that he gave it up in the very first days of his ministry.
This was only the beginning of a long series of broken promises.
Varoufakis explains that he embarked on various significant projects along with his team. Some are extremely interesting: “developing the parallel payments system” in case of conflicts with the creditors; the campaign against the previous government’s decision to promote gambling for increasing public revenues; certain measures to counter widespread tax evasion, etc.
Other projects were more than dubious, or even downright unacceptable. Particularly one such was a tax amnesty project. Varoufakis describes it as follows: “I would announce that for the next fortnight a new portal would be open on the ministry’s website on which anyone could register any previously undeclared income for the period 2010-2014. Only 15 per cent of this sum would be required in tax arrears, payable via web banking or debit card. In return for payment, the taxpayer would receive an electronic receipt guaranteeing immunity from prosecution for previous non-disclosure.” [13]
Or another quite suspicious initiative:
“Catching hundreds of thousands of tax cheats and shocking Greek society out of its tax-evading ways.” [14]
The radical image of Varoufakis
On January 30 in Athens, Varoufakis held his first meeting with Jeroen Dijsselbloem, the Dutch “social-democratic” minister who was then the President of the Eurogroup. A press conference followed and it was largely instrumental in presenting an immensely radical image of Varoufakis to the public eye, nationwide and abroad. TV channels from all over the world telecast the clash between Varoufakis and Dijsselbloem. Varoufakis defied an arrogant Dijsselbloem, who was obviously rude to a minister he had come to meet.
The mainstream media attacked Varoufakis, but the Troika officials as well as the foreign dignitaries behaved like bullies who could not bear those signs of resistance while Varoufakis seemingly symbolized a nonconformist government resisting the injustice of the powerful. [15]
Varoufakis and the Syriza government’s programme
The Thessaloniki Programme, presented in September 2014, promised to terminate the second Memorandum and introduce a national reconstruction plan instead, abolish most of the public debt, discontinue the austerity measures, reinstate the Greek people’s social rights, restore wages and pensions to where they were before the first Memorandum of 2010, end privatization, nationalize the banks, establish a public development bank, reduce the private debts of low-income households towards the State and the private banks, create 300,000 jobs, and revive democracy (see Text Box: Excerpts from the Thessaloniki Programme ).
Varoufakis was opposed to this programme and makes no bones about it in his book. His take on September 2014 is as follows: “…Alexis had delivered a major speech in Thessaloniki outlining Syriza’s economic platform. Gobsmacked, I got hold of the text and read it. A wave of nausea and indignation permeated my gut. Straight away I went to work. The article that emerged less than half an hour later was used soon after its publication by Prime Minister Samaras to lambast Syriza in parliament: ’Even Varoufakis, your economic guru, says that your promises are fake.’ And so they were (…..) It was in fact such a ramshackle programme that I did not even bother to criticize it point by point.” [16]
He claims to have accepted the ministerial post on condition that six economic proposals would be implemented on a priority basis. Let us take a look at those measures once again. [17] “Debt restructuring comes first” (author’s note: without reducing the debt stock, while the Thessaloniki Programme promised to write off most of the “public debt’s nominal value”). “Second, a primary surplus of no more than 1.5 per cent of national income and no new austerity measures. Third, wide-ranging reductions in sales and business tax rates. Fourth, strategic privatizations under conditions that preserve labour rights and boost investment. Fifth, the creation of a development bank that would use remaining public assets as collateral to generate a domestic investment drive, and whose dividends would be channelled into public pension funds. Sixth, a policy of transferring bank shares and management to the European Union (...)” [18]
Of these six priorities, only the second and fifth corresponded to the Thessaloniki Programme, but these were abandoned after the agreement of February 20, 2015 (see below).
| Excerpts from the Thessaloniki Programme presented by Alexis Tsipras on September 13, 2014 [19] “(...) We demand a strong mandate, supported by a large parliamentary majority and an extensive social consensus, so that a negotiation that best protects the interests of our people in Europe can be tabled. We immediately demand a popular verdict and a negotiation mandate that can ”write-off the greater part of the public debt’s nominal value and ensure its viability." [20] " What happened for Germany in 1953 [21]…can also happen for the South of Europe and Greece. We demand (...) to:
|
The proposals Varoufakis made to the Troika
Contrary to the caricature presented in the dominant media and by the governments of the creditor countries, Varoufakis, as chief negotiator, made very moderate propositions to the Troika which were a setback, or even in contradiction with the Thessaloniki Programme. He assured the “Adults” that the Greek government was not asking for a reduction of the debt. He suggested that the different forms of debts held by the Troika be exchanged for new issues over a longer period, thus reducing the annual strain on the Greek budget. He did not dispute the legitimacy or the legality of the debts. This is very serious.
He did not point out the right and the will of the Greek government to conduct an audit of the debt. In his book there is no mention of the debt audit commission created by the President of the Greek parliament. Not one word. This certainly was not because this initiative was not known in Greece. On the contrary, it was very well spotlighted. Varoufakis chose to remain completely silent on the debt commission because it did not enter into his vision of the negotiations.
He proposed to redraft a part of the ongoing Memorandum in order to prolong it and to adapt certain of the measures it proposed. He repeatedly affirmed that 70% of them were acceptable. He added that many measures that could be applied were positive but that 30% of the Memorandum should be replaced by measures that would have a neutral effect on the budget. That meant introducing new measures, particularly to ease the humanitarian crisis, which would not increase the deficit that the Samaras government had budgeted because they would generate increased revenues or have the result of reducing spending in certain areas.
Varoufakis confirmed that the government that he represented would not challenge the privatizations that had taken place since 2010, and moreover, more were possible on condition that the price was right and the buyers respected the labour rights.
Varoufakis also confirmed that Greece could not be salvaged unless it remained in the Eurozone. He held back any mention to the opposing negotiators that the Syriza party programme implied that the Greek State would exercise control over the private banks of which it was the majority shareholder.
One of the truly radical elements in Varoufakis’s discourse is that on several occasions at the start of his period in office he said plainly that the Troika was not democratically legitimate and his government would not collaborate with it. However, when referring to his book it is evident that in practice he accepted the Troika. It only disappeared in words. The only concession the Troika made was to agree to the pretence that it did not exist. Although the Troika played hide and seek it knew how to make its presence felt. Varoufakis shows that the Troika was always present and real at all the key moments of negotiation and of decision taking.
For 2015 alone the Greek state needed €42.4 billion for its debts
Varoufakis well describes how heavy the debt burden was. He had worked out the needs for repayments for the year 2015: “(…) it turned out that for 2015 alone the Greek state needed €42.4 billion just to roll over its debts, the equivalent of 24 per cent of national income. Even if the troika were to disburse all the money specified by the second bailout loan agreement, we would still be €12 billion short. For a country with no capacity to borrow from private investors, empty coffers and a devastated population, meeting these debt repayments meant only one thing: the plunder of what was left in the reserves of pensions funds, municipalities, hospitals and public utilities, while going to the troika cap in hand to borrow huge amounts more, pledging to squeeze our pensioners, municipalities, hospitals and public utilities yet further, all in order to give the money back to the troika. Only a lobotomy could have convinced me that doing this was in our people’s interest.” [50] Further on he says, recounting his first meeting with the President of the Eurogroup on 30 January in Athens, “[…] debt repayments for 2015 alone amounted to 45% of all the taxes it hoped to collect.” [51]
In continuing to repay, the situation could only get worse
The problem is that in accepting, on 20 February, to continue all debt payments according to plan until 30 June 2015 he accepted a situation worse than the hellish one described above because the creditors had not taken on any promise to make the least payment. €7 billion would be needed before the end of June 2015. That sum must be compared with the €2 billion needed by the Thesaloniki Programme to meet humanitarian needs, to the end of 2015. My own figures show that because of debt repayments, no more than €200 million was spent by the Tsipras government between February and June 2015. Quite insufficient.
It was clear that in continuing to repay without the guaranty of receiving fresh money the situation could only get worse. It was just as clear that the second Memorandum had to be followed by a third for the creditors to grant new loans to repay the previous ones.
Varoufakis’s claim that another outcome was possible was only a fanciful belief that the creditors could be simply persuaded to allow Greece to end the most antisocial of the austerity measures, the shackles of the Memorandum, and to reduce the size of repayments during 2015 (without changing the outstanding capital). This position could not hold water.
Varoufakis’s negotiating stance
At the meeting on 30 January between Varoufakis and the President of the Euro-group, Jeroen Dijsselbloem, the latter clearly indicated that he was not interested in the mandate that the Greek people had granted to the Tsipras government. He refused to replace the Memorandum with a new agreement and would not even modify the Memorandum as it existed, saying that the European Central Bank could prevent Greek banks from having normal access to liquidities.
In order to change the situation, Varoufakis looked for some support and met the French and Italian leaders (hoping to find support from their so called “socialist” governments in loosening the grip of austerity policies) and the British leaders who at the time were seeking to turn their economy around even if that caused a bigger deficit. Then he went to Frankfurt to try to sweet-talk the ECB and finally to Berlin.
Before going a meeting was held with Tsipras, Pappas and Dragasakis. Varoufakis got the green light to not ask for a morally sound debt write-off. In so doing Varoufakis renounced a fundamental argument before international public opinion that could have put the creditors into difficulty on one their weakest points.
Varoufakis recognized that the secret agreement at this meeting was in contradiction with the official Syriza orientation: “Syriza’s position on public debt had been nothing more than a crude demand for an unqualified write-down. With half the party still demanding a unilateral haircut of most of the debt, most not even privy to the idea of a debt swap, and with only a tenuous, verbal covenant binding the leadership trio to my strategy [...]” [52] Thus Varoufakis rejected the programme on which Syriza had been elected to government and rebuffed the Syriza base.
As from 1st February, a week after Syriza formed its government, Varoufakis began his first tour of Europe as a Minister in the company of Euclid Tsakalotos. On Sunday 1st February the schedule was tight: an official meeting with Michel Sapin, French Minister of Finance, another with Emmanuel Macron, French Minister of the Economy and four unofficial meetings with Poul Thomsen, deputy director of the IMF for European affairs, Pierre Moscovici, European commissioner for economic and monetary affairs, Benoît Cœuré, second in command at the ECB and with Francois Hollande’s Secretary. On Monday second February he was in London with George Osborne, the Chancellor of the Exchequer (Minister of Finance), after which he gave a talk to two hundred financial actors invited by the Deutsche Bank. The next day Varoufakis went to Rome to meet the Italian Minister of Finance, Pier Carlo Padoan. Finally, on the 4th he had a meeting in Frankfurt with Mario Draghi and the executive council of the ECB.
Varoufakis at each occasion proposed an exchange of debt without reduction or write-down. [53] He made it clear that the Greek government would pay private sector debt on the nail (about 15% of the Greek debt was held by private holdings - Greek or foreign banks, investment funds or vulture funds, among others).
Varoufakis demonstrates the rampant hypocrisy in the leaders he met. Michel Sapin seems to take the cake for duplicity: behind the scenes he was very encouraging to the proposals to exchange debts and make far-reaching amendments to the Memorandum and show solidarity with the Greek government. Then at the press conference he adopted a completely different position.
In private: “(...)Michel’s response was that of a brother-in-arms: ’Your government’s success will be our success. It is important that we change Europe together; that we replace this fixation with austerity with a pro-growth agenda. Greece needs it. France needs it. Europe needs it.”
It was the cue I needed to put forward the basic elements of the Modest Proposal, which Stuart Holland, Jamie Galbraith and I had been working on for years. I explained how the ECB could partially restructure the whole of the eurozone’s public debt without haircuts and without asking Germany to pay for everyone else or guarantee the periphery’s public debt. I outlined how investment-led recovery could produce a new deal for Europe by channelling the ECB’s quantitative easing programme into infrastructure projects or green energy bonds issued by the European Investment Bank. Michel listened intently and, when I had finished, declared that such proposals were the way forward for Europe. We had delayed the implementation of such policies for too long, he said. Together we must restart Europe, he thundered. The only thing that Michel did not do was suggest we join hands and rush out to storm the Bastille singing the Marseillaise!". [54]
Then at the press conference Sapin adopted a completely different position, saying that the Greek government should respect its obligations to its creditors and that Tsipras should apply the agreements signed by previous governments.
European Commissioner Pierre Moscovici treated Varoufakis like a comrade with whom he was going to change the whole of Europe. [55] Varoufakis quickly realised that Moscovici was not at all acting as one would expect from an ally to the Greek government.
All through the book Varoufakis speaks very highly of Emmanuel Macron, who at the time was the french Minister of Economy.
The first contact with Benoît Cœuré, a Director of the ECB, was very revealing. He came straight to the point - did the government have, or have not, the intention to restructure unilaterally the Greek government bonds that the ECB owned? Putting the issue in this urgent fashion plainly revealed it was what the ECB feared more than anything else. It was a perfectly feasible option that Varoufakis had mentioned several times before becoming Minister. The values in question had been issued under Greek jurisdiction over the 2010-2011 period. The ECB had bought them at 70% of their value but counted them at 100% while at the same time demanding excessive interest rates. Equivalent values held by Greek pension funds had undergone a “haircut” of 53% in March 2012. The ECB had refused that the same measure be applied to the values it held. The Greek government would have had the moral, and indeed the legal, right to take such an action. It will be seen further on that, finally, the Greek government never would take such action on the ECB-held values, even though it should have done so and would have had a very good chance of winning the issue.
The IMF was continually making declarations to mystify the Greek government and public opinion
Poul Thomsen, on the other hand appeared very favourable to Greece simply writing-off €53 billion owed to fourteen Eurozone countries. Whereas, Varoufakis only talked about a restructuring, Thomsen said: "’This is fine. But it is not enough. We need an immediate annulment of part of your debt. No swaps no delays. Just take €53 billion and erase it.’
That’s it, I concluded: I am dreaming! He was talking about eliminating at a stroke the entire debt (...)“ [56] The IMF was continually making declarations to mystify the Greek government and public opinion. Telling Varoufakis to”erase" €53 billions of bilateral debt to Eurozone countries cost the IMF nothing. It had no intention of agreeing to a reduction on the Greek values it held itself. It was a diversion that was used several times. Independently of these declarations, the IMF had always heavily insisted that Greece follow brutal neoliberal policies.
In London, before a hall full of bankers and investment fund directors Varoufakis sought to reassure them that private creditors have nothing to fear. He reiterates his false thesis of the 2010 Greek government failure (see details in Varoufakis’s questionable account of the origins of the Greek crisis and his surprising relations with the political class). This comforts them and gives them leave to concentrate on the public debt crisis. He told them: “Second, I admitted that we had a divided cabinet; that, yes, there were those who wanted Grexit, who were not interested in negotiating with the EU and the IMF, convinced that nothing good would come of it, and who just wanted out. And then there were those of us around the prime minister whose objective was a negotiated solution within the eurozone. But, I added on a positive note, this division would not affect the negotiations, which would be conducted by my core team. Our Grexiteer colleagues would not get in the way but would be patient and give us a chance to demonstrate that a viable agreement was possible. As long as Greece’s official creditors, the EU and the IMF, were willing to strike a mutually advantageous agreement, the world of finance had nothing to fear from my Left Platform colleagues in government.” [57]
Several times, Varoufakis tried to convince his hearers that the majority of the government had totally reasonable positions, which should be given support in order to neutralize, within the Syriza government and in the party, what he considered to be an irresponsible extreme-left. He was sure he had convinced the hall: “As I had remarked to the City’s financiers (…) it was a measure of the depth of the euro crisis that it took a radical left-wing government to table mainstream liberal proposals for its solution.” [58]
On the second February Varoufakis dined with two of his important international supporters: the conservative Lord Lamont and the ex-specialist in shock therapy, Jeffrey Sachs. “Over coffee and after-dinner drinks I wondered if maybe my proposals had done the trick. London-based financiers, Tory politicians, influential journalists and former members of the IMF all appeared to see my point.” [59] He believed he had reassured the markets because the day after his trip to London: “Not only had the stock exchange gone up by 11.2 per cent but, more importantly, shares in Greece’s banks had risen by more than 20 per cent” [60]
While in Rome Varoufakis met the Italian Minister of Finance, who informed him that he softened-up the German government and particularly Schäuble by pushing through a labour market reform in the face of opposition from the social movements. “That turned out to be ’labour market reform’ - code for weakening workers’ rights, allowing companies to fire them more easily with little or no compensation and to hire people on lower pay with fewer protections. Once Pier Carlo had passed appropriate legislation through Italy’s parliament, at significant political cost to the Renzi government, the German finance minister went easy on him. ’Why don’t you try something similar?’ he suggested. ’I’ll think about it,’ I replied. ’But thanks for the tip.’” [61]
In the end, that is where the strategy that Tsipras and Varoufakis choose together led. The Italian “socialist” Minister’s words contain profound truth. The reasoning of the European leaders is to inflict the easing of constraining labour legislation and lower wages to render European goods and services competitive in the face of foreign-produced merchandise and services. The conditions inflicted on Greece are part and parcel of this strategy and Varoufakis has refused to understand that or radically oppose it. The enormous Greek debt is a fundamental weapon used by the public creditors to make an example of Greece to drive home what it costs to any people who may resist their power, and of course to strip workers of their rights.
On 4 February 2015, the ECB brings out its top guns on the Greek Government
On 4 February in Frankfurt, Varoufakis met ECB directors: Mario Draghi, its President, and three others - the Frenchman Benoît Cœuré, the German Sabine Lautenschläger and the Belgian Peter Praet. Varoufakis was still accompanied by Euclid Tsakalotos.
Mario Draghi announced that the Board of Directors of the ECB would probably decide, during that afternoon, to cut-off access to liquidities for Greek banks. As Varoufakis says “It was an explicit, calculated act of aggression.” [62]
This requires explanation. The ECB provides liquidities to the banks in the Eurozone. To gain access, the banks (whether public or private) must deposit financial securities as guaranties. This is called “collateral.” The collateral may be of different types, such as, among others, public debt securities or securities on private corporations. The ECB may consider that the instruments that are deposited are doubtful, either because they lack sufficient guarantees or are low quality. In this case it may block access to further funds. This provokes doubt and a “run” on the banks.
The only way out for the banks in difficulty is to get emergency liquidities from the national central bank. This is a costly solution. Should the national central banks do this they must demand a high-risk interest rate. What is more the sums available are limited and evolve weekly. When this happens the national central bank’s directors meet each Friday to fix the amounts to be made available for the week to come, after analysis of their situation. Again, the ECB must agree and may limit the volume of liquidities that may be made available. Should this happen the government will order banks to shut their doors. Which is what happened at the end of June 2015 when the ECB, in order to influence the 5 July referendum, stopped all emergency liquidities. This forced the Greek government to close the banks as from Monday 29 June. [63]
Not coercion from ECB but direct aggressive action
Back to 4 February 2015. The ECB decision to close Greek banks’ access to funds was clearly a quick and aggressive strategy to destabilize the Greek government. This strategy had been enacted even before the elections took place. In fact, at the end of December 2014, once the Greek government had called snap elections to take place on 25 January 2015, the director of the Greek central bank, Stournaras, one-time friend of Varoufakis, [64] deliberately made announcements aimed at worrying depositors in Greek banks. In coordination with Samaras, Stournaras weighed on the Greek voters, hoping to maintain the outgoing “New Democracy” conservative government. Consequently, withdrawals began to increase sharply. [65]
Samaras’s oft repeated campaign themes were: “If you vote Syriza relations with Brussels will be difficult; the ECB will cut liquidities; chaos is just around the corner.” In spite of this coercion Syriza won the election, but Stournaras remained the governor of the Greek central bank - he is in Greece the plenipotentiary of Mario Draghi and the European leaders opposed to Syriza. [66] He should have been replaced. He was not, and as we shall see further on it was Varoufakis who convinced Tsipras to keep him in place. [67]
So, the ECB decided on 4 February 2015 to immediately apply extreme measures on the Tsipras government. Not moral pressure or coercion from ECB but direct aggressive action, as Varoufakis describes it in the passage cited above.
The effects of such decisions are, in fact, immediate. First, the Greek banks are forced to pay higher rates to have access to liquidities. This weakens their positions. Second, short-term financing for the Greek State becomes much more difficult. This meant that the liquidities granted by the ECB were used to purchase short-term (less than one year) Greek treasury bills. This permitted the Greek government to keep going (Eurozone governments cannot borrow from their own central banks). As the ECB was limiting liquidities, the Greek government had to borrow from Greek banks at much higher interest rates, thus adding to the Greek debt burden.
So, by reducing Greek banks’ liquidities and increasing the cost of financing, the ECB made it more difficult for the Greek treasury to find funds from the Greek banks. [68] At the same time, on the one hand, other private foreign funding was difficult to find, or downright non-existent. On the other hand, as we have seen, the ECB no longer intended to cede to Greece the profits that it had made on its debt (€2 billion should have been reimbursed over 2015). This also was a purely political decision. In 2014 the ECB had made some reimbursements to the Samaras government even though it was behind in applying the second Memorandum. Even before the result of the election of Tsipras was known, emissaries of the Euro group and the ECB made it known that the promised €2 billions would not be paid.
Finally, because the ECB considers that securities lose their value because of the situation of the banks, as well as of the State, deteriorates, this increases withdrawals and further restricts the State’s access to funds.
In June 2014, the result had been overvalued in order to justify the ECB helping Greek banks during the period of the Samaras government
There is further proof of the politically aggressive nature of the ECB’s decision to cut off liquidities to Greek banks. As we have said, the ECB may consider that a country’s banks are of such high risk that they should not receive further liquidities and a rescue plan should be applied to them, for example, by injecting fresh capital (which had been done in the framework of different Memorandums). The problem for the ECB is that in June 2014 all the Greek banks had passed the European banking authority stress test. It was clear that the result had been overvalued in order to justify the ECB helping Greek banks during the period of the Samaras government, who had just lost the European elections to Syriza. What is certain is that the banks were in a very bad way, in 2009 as in 2014 and in 2015. The ECB pretended surprise in discovering the real situation just days after the election of Tsipras. This was all purely political manoeuvring.
On the morning of 4 February, how did Varoufakis, who describes the decision of the ECB to restrict normal access to liquidities to Greek banks as a premeditated act of aggression, react to this news? Very moderately! Unbelievable!
This is what he said: "I began my reply by expressing my great and genuine respect for the manner in which Draghi had striven from the first day of his presidency to do whatever it took to save the euro while adhering as far as possible to his bank’s charter and rules. This skilful balancing act was what had bought Europe’s politicians the time they needed to get their act together, address the crisis properly, and thus alleviate the impossible circumstances in which the ECB had found itself: responsible for saving the eurozone’s failing economies while being prohibited from using the essential means - ones available to any normal central bank - of doing so.
’Alas, the politicians did not use the time you bought for us wisely, did they?’ I said. The expression on Mario’s face conveyed embarrassed agreement. I continued: ’You have done a fantastic job in keeping the eurozone together as well as in keeping Greece in the euro, especially in the summer of 2012. What I am here to put to you today is that you continue to do this during the next few months, granting us politicians the time and monetary space necessary to strike a workable deal between Greece and the Eurogroup (…)" [69]
Not a word on the brutality of the ECB since 2010, nor on the scandalous profits made by buying Greeks bonds between 2010-2012. On the contrary, Varoufakis compliments the Board of the ECB for its “fantastic job.” Then he continues by again proposing to exchange values in order to avoid reducing the value of the Greek bonds held by the ECB.
Draghi refused the proposal and did not allow himself to be cajoled by it. Draghi reproached Varoufakis for having mentioned, several times, a possible unilateral write-down of the ECB’s Greek bonds (see further up). Varoufakis replied: “I will not even think of it - as long as you do not close down our banks.” [70]
How could Draghi interpret that? The only conclusion he could come to was that if that afternoon the decision was taken to close Greek banks’ access to liquidities, without going so far as to actually close them, there would be no great reaction from the Greek government. So it was done! In doing so, this put pressure on the Greek government, started to stifle it and bring it to bay in the hope of extracting concessions.
Another criticism can be made about Varoufakis’s proposal. Whereas he himself, several times before he became Minister of Finance, had denounced the unacceptable, abusive and highly scandalous nature of the ECB operation on the Greek securities bought during the 2010-2012 period, he proposed to Draghi a “money laundering” operation. These old securities (which are dubious, to say the least) are replaced by new securities that carry the same value (but at lower interest rates). We must realize that by doing so, Varoufakis made it almost impossible to apply a Plan B (which included the unilateral haircut proposal): if the negotiations failed, it would then be difficult to explain to journalists and public opinion that the Greek government has the right to apply a unilateral haircut. Indeed, if Greece was prepared to exchange its debt securities held by the ECB for securities of the same value, why should it then be right for it to apply a discount? Consistency in argumentation is necessary to convince. The government should have told the truth loud and clear about the scandal of Greek securities purchased between 2010 and 2012. That consistency was wanting in Varoufakis’s reasoning.
Moreover, it is obvious that this proposal by Varoufakis had absolutely no chance of success because it would have set an unacceptable precedent for those in favour of austerity. The problem is not technical: Varoufakis’s proposal did not raise any real technical problem. The obstacle was and still is political: European leaders are totally opposed to the idea of allowing European states (whether they are in the Euro zone or not) to pool their debts because this would remove a major possibility of pressure for continuing the neoliberal offensive. Varoufakis’s proposal went completely against the logic of the most recent European treaties. It had no chance of success and the negotiating strategy should not have been based on this fantasy.
The demand included in the Thessaloniki Programme should have been put forward: the cancellation of most of the debt, explaining that it was illegitimate, odious, illegal and unsustainable. Of course, European leaders could not accept this request but the Greek government could develop an international campaign of explanation in order to gain broad public support. It could initiate an audit process and declare a moratorium until the audit was completed.
It was essential not to get caught in the wheel of repayment. It was necessary to use the principle of international law that allows a State to declare a moratorium on payments in view of the state of necessity in which it finds itself. [71] The existence of a humanitarian crisis was the indisputable proof of such a state of necessity. The following reasoning had to be developed: “We are launching an audit (with citizen participation) because what is at stake is finding out why we have reached such a high level of indebtedness - national and international public opinion must know. We do not anticipate on the results of the audit, but it is only normal for payments to be frozen during an audit. Therefore, we suspend repayments during the audit, except for short-term debt. We were elected to replace the Memorandum with a new reconstruction plan. Let’s give time to the negotiation process and meanwhile be patient as we suspend scheduled payments on long-term debt.” If it had launched and used an audit process, the Greek Government should have said, in order to strengthen its position vis-à-vis the Troika: “I am merely enforcing Article 7 (9) of Regulation 472 adopted by the European Parliament on 21 May 2013 requiring EU Member States subject to a structural adjustment plan to carry out a full audit of their debt in order to explain why the debt has reached an unsustainable level and to detect possible irregularities.”
Payment suspension had to be urgently decreed, for instance on 12 February 2015. Indeed, between 12 February and 30 June 2015, Greece was to repay €5 billion to the IMF (see table below :).
Maturity dates of securities held by the IMF
| IMF | Feb. 12, 2015 | €747,695,915 | Loan under the IMF’s first bailout program for Greece, in 2010 |
| IMF | March 6, 2015 | €299,084,589 | Loan under the IMF’s first bailout program for Greece, in 2010 |
| IMF | March 13, 2015 | €336,470,163 | Loan under the IMF’s first bailout program for Greece, in 2010 |
| IMF | March 16, 2015 | €560,783,604 | Loan under the IMF’s first bailout program for Greece, in 2010 |
| IMF | March 20, 2015 | €336,470,163 | Loan under the IMF’s first bailout program for Greece, in 2010 |
| IMF | April 9, 2015 | €448,626,883 | Loan under the IMF’s first bailout program for Greece, in 2010 |
| IMF | May 12, 2015 | €747,695,915 | Loan under the IMF’s first bailout program for Greece, in 2010 |
| IMF | June 30, 2015 | €1,532,808,519 | Loan under the IMF’s first bailout program for Greece, in 2010 |
If we take into account the other amounts to be paid to the IMF in 2015, an additional €3 billion must be added. The ECB demanded repayment of more than €6.5 billion to be made in July-August 2015.
Maturity dates of securities held by the ECB and EIB (European Investment Bank)
| ECB | July 20, 2015 | €2,095,880,000 | Bonds held by ECB exempted from the 2012 default | 3.70% |
| ECB | July 20, 2015 | €1,360,500,000 | Bonds held by national central banks exempted from the 2012 default | 3.70% |
| EIB | July 20, 2015 | €25,000,000 | Bonds held by the European Investment Bank; exempted from the 2012 default | 3.70% |
| ECB | Aug. 20, 2015 | €3,020,300,000 | Bonds held by ECB exempted from the 2012 default | 6.10% |
| ECB | Aug. 20, 2015 | €168,000,000 | Bonds held by national central banks exempted from the 2012 default | 6.10% |
Action also had to be taken regarding banks. As the ECB took the initiative to sharpen the Greek banking crisis, it was necessary to act at this level as well and implement the Thessaloniki Programme which said: “With Syriza in government, the public sector will take over control of the Hellenic Financial Stability Fund (HFSF) and exercise all its rights over the recapitalised banks. That means that it will make decisions about the way they are run.” It should be noted that in 2015 the Greek State, through the Hellenic Financial Stability Fund, was the main shareholder of the four largest banks in the country, which accounted for more than 85% of the total Greek banking sector. The problem is that, because of the policies pursued by previous governments, its shares had no real weight in the banks’ decisions because they did not entail the right to vote. It was therefore necessary for the Parliament, in accordance with what Syriza had pledged, to transform the so-called preferential shares held by the public authorities (which do not entail voting rights) into ordinary shares giving the right to vote. Then, in a perfectly normal and legal way, the State could have exercised its responsibilities and provided a solution to the banking crisis.
Finally, two important steps still had to be taken. Firstly, in order to deal with the banking and financial crisis sharpened by Stournaras’s statements since December and by the ECB’s decision on 4 February, the government should have decreed a control of capital movements in order to put an end to flight of capital out of the country. Secondly, it should have set up a parallel payment system. Varoufakis claims that he had a concrete proposal in this respect but he did not propose to implement it following the ECB’s aggression on 4 February.
We shall comment on the alternative strategy to be followed in relation to the debt and on the banking crisis further in this series.
In the evening of 4 February, after receiving a phone call from Mario Draghi confirming that the granting of normal liquidity had ceased, Varoufakis published a press release which began as follows: “The ECB is basically trying to abide by its own rules, motivating both us and our partners to reach a political and technical agreement quickly, while keeping the Greek banks liquid.” [72] He himself characterizes his statement as follows: “packaging a shock as a non-event.” [73]
Conclusion
Varoufakis embarked on a process of denial of reality that was to lead him and the narrow circle around Tsipras to enforce a fateful agreement on the rest of the government, Syriza and the Greek people on 20 February 2015, i.e. less than a month after the election victory. Of course, the Troika members are primarily responsible for the destructive content of this agreement and we have consistently denounced them, but Varoufakis-Tsipras could have refused to sign such a dire agreement. In the next article, we will analyse the path followed towards the first surrender to the creditors and specify the alternative path that should have been taken.
Eric Toussaint
Acknowledgements: Thanks to Marie-Laure Coulmin-Koutsaftis, Nathan Legrand and Claude Quémar for their careful rereading and for their wise pieces of advice.
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