Will the Germans Derail the Tentative Greek Third Bailout?

As a result of my suffering from a case of Greek deal burnout, you are getting a short assessment of the state of play. But in the spirit of the saying attributed to Pascal, that he wrote a long letter because he didn’t have time to make it shorter, my uncharacteristic brevity on this topic will hopefully be a boon.

Greece and a negotiating team representing the creditors have reached a tentative third bailout deal for €85 billion. The money would come entirely from the European Stability Mechanism. It needs to be approved by the Eurogroup unanimously on Friday to go ahead. If that deal fails to be approved, the fallback is to give Greece a bridge loan to enable it to make upcoming bond payments due (most important, to the ECB on August 20) and the open points would be worked out to conclude the big deal later.

The Germans, in the form of Wolfgang Schabule, are sabre rattling by circulating a memo that beefs about some of the elements of the proposed deal. Even though the Greeks are still committed to meeting lunatic primary surplus targets, that’s not good enough for Schauble & Co. since the goals were adjusted downward from the levels agreed to in June due to the severe fall in the economy as a result of the July bank holiday and the continuation of capital controls. And even though the Greek government is set to pass a raft of painful legislation today, some issues, won’t be resolved until Greece has performed further studies. For instance, the precise labor market reforms will depend on research to be completed by October. That’s apparently too much “trust me” for the Germans. They want all the details nailed down before they hand the big money over.

However, other elements are contributing to the German foot-dragging. The Germans want the IMF in the deal. The IMF has adeptly managed to pull money off the table by revoking a €16.4 billion commitment that was part of the “second bailout” (the excuse was that conditions had changed so much that the agency needed to make a new assessment). The IMF negotiated and blessed this third bailout proposal, but will not decide whether to chip in any funds until the fall. Wanting the IMF in may actually be the biggest driver of the German sulking. But from a financial perspective, the IMF already has plenty of skin in the Greece game via its outstanding loans, so it’s not as if a failure to ante up more means it won’t be involved. And the IMF is always the most senior creditor, so having the IMF participate reduces the Europeans’ exposure but also subordinates them a bit more.

The tone of the media coverage is, in effect, that the Greeks have capitulated so fully that the Germans would look churlish in trying to extract more from the prostrated borrower, particularly since anyone who is not a devout austerian recognizes that the bailout is guaranteed to fail. Requiring a depressed-tending-to-imploding economy to produce a primary surplus is certain to produce continued contraction, particularly since growth in the rest of the world is faltering. Thus the consensus view is that the Germans will make some noise at the Eurogroup but the bailout is likely to win approval.

However, negotiations are fragile and uncertain events. In July, Greece looked almost certain to be pushed into a Grexit, with only France, Italy, and Cyprus supporting its position at the last bailout decision point in July. Yet Hollande was able to get the Greece to agree to a painful enough tentative deal to pull back from the cliff.

The Germans, and in particular Schauble, have never been terribly concerned about foreign optics. In this case, Schauble would not appear to be working towards a Grexit, merely seeking more time to make sure all the fine points of a big deal are nailed down. It’s not out of the question that he could pull off selling that faux reasonable condition, given that being hard on Greece is a popular position in the other core creditor countries like the Netherlands, plus the Baltic countries tend to follow Germany.

But the biggest factor working against the Germans is Greece fatigue. The summer holiday should already be underway for senior Eurocrats. I’m sure they’d prefer to go on their vacations having put Greece largely to bed for at least a year or so, and being able to come back from their respites and deal with all the other issues that they’ve had to neglect as the rolling Greece crisis has pushed aside other responsibilities. Thus the human dynamics, which played right into the hardliners’ hands earlier this year as all the creditors lost patience with Greece, may trump what would normally be German’s considerably advantaged negotiating position.