Deal Vital Before Greece Spins Out Of Control

“This station was reopened not by the government, but by the struggles of its employees,” said Greek prime minister Alexis Tsipras on Thursday. “It’s a celebration of democracy”.

Writing from Athens, it’s hard to miss the sense of defiance felt by many Greek people, coupled with grim satisfaction. Having been closed as part of the International Monetary Fund’s (IMF’s) austerity drive two years ago, the Greek state broadcaster, ERT, has just gone back on air. “Today we must all be happy and look forward with optimism,” said Tspiras, as he visited the station, taking to its airwaves to note that “fair struggles are eventually vindicated”.

Many ordinary Greeks were shocked and offended when ERT was closed in June 2013 to comply with bail-out conditions imposed by Greece’s international creditors. That’s why Syriza, elected on a wave of popular discontent in January, passed a law to reopen it, with Tsipras calling the broadcaster’s closure “a crime against Greek people and democracy”.

ERT will now apparently be funded with an additional monthly fee levied on Greek citizens, with many of the station’s 2,500 staff getting their jobs back – a direct contravention of the bail-out terms. The same day that ERT rebooted, Greece’s foreign paymasters chose to quit talks with Athens. “The ball is now very much in Greece’s court,” said Gerry Rice of the IMF, after there was “no progress” during marathon negotiations in Brussels, with both sides heading home.

Greece’s creditors remain deeply unhappy about the economic reforms Athens is offering in exchange for the final €7.2bn (£5.2bn) slice of bail-out cash, part of an earlier deal which expires at the end of June. With Greece owing the IMF €1.6bn by then, together with another €5.2bn of short-term bonds becoming due, that cash is vital to avoid default. Then there’s the €5.9bn Athens owes by the end of July – including €3.5bn to the European Central Bank (ECB). Plus another €4.4bn by the end of August, €3.2bn of which must be paid to the eurozone’s central bank.

If Greece defaults on the IMF – and that now looks inevitable, unless the Washington institution climbs down – there are months of red tape to get through before anything actually happens. If Athens defies the ECB, though, then the Greek banks, by law, lose the credit lines preventing them from imploding and keeping the country’s head above economic water.

Declared non-performing loans now top €90bn, an astonishing 42pc of GDP and up from €56bn in 2012 when this existential crisis began in earnest. If Greece defaults on the ECB, the banks will instantly collapse, savings will evaporate and there will surely be civic unrest.

Given the punishing payment schedule over the coming months, to say nothing of the gargantuan €320bn stock of public debt, a loosening of the policy conditions, coupled with some kind of broader debt relief, must now happen. The sooner that’s recognised, whether Greece quits the euro or not, the better the chances of avoiding serious rioting and, actually, saving Greek democracy.

The notion Syriza will see the light, and agree to the IMF’s requirements on taxation, pension reform and all the rest of it is absurd. For the concessions already made, the Greek government has lost the support of big chunks of the population. Here in Athens, an amalgam of trade unions has occupied the finance ministry, their banners depict Tspiras alongside previous prime ministers George Papandreou and Antonis Samaras, as “responsible for failing to pull our country out of crisis”.

A sovereign default on the fringes of Europe has long threatened to spark another Lehman moment, sending financial markets everywhere haywire and upending the global recovery. That must be avoided at all costs. Western negotiators and their political masters should bear in mind, also, that the longer Syriza fails to secure some kind of “prize” from this stand-off, the higher the probability that the ragbag of smaller, more radical Greek parties, some of them pretty nasty, gain influence – and maybe even power. Negotiations have happened, friendships made and broken, tempers lost. It’s time now to do a deal, before the situation – on the financial markets, the streets or both – spirals out of control.

As well as hoping for a resolution, many conversations here in Athens – whether with government officials, business folk or taxi drivers – soon turn to Russia. This column said many months ago that “the question of Russian sanctions renewal will loom large over the upcoming row to keep Greece in the eurozone”. That is coming to pass.

The EU must decide, by the end of July, whether or not to renew sanctions on Russia. While the likes of the UK and Germany have dutifully claimed that will happen, the reality is that a unanimous vote of the 28 EU member states is needed.

There are several countries that have indicated they may not play ball, including Spain, Italy and, above all, Greece. Their reasons for doing so are various – not only close trading links with Russia, but also the desire to get leverage over Brussels to be used in other negotiations. In the case of Athens, though, even more is at stake. “Just because Greece is debt-ridden, that doesn’t mean it is bound hand and foot and has no independent foreign policy,” observed Vladimir Putin recently. “Greece could earn hundreds of millions of euros through gas transit.”

Once the EU imposed sanctions on Russia in March 2014, Moscow responded by blocking agricultural exports to Russia. This has ruined a fair few West European farmers given that, pre-sanctions, a third of EU fruit and vegetable exports were sold in Russia, and a quarter of exported beef.

Less widely noticed was that Russia also cancelled “South Stream” – a Black Sea pipeline that was meant to pump Russian gas to Bulgaria (in the EU since 2007, of course). That pipeline has now become “Turkstream”, going across the Black Sea to Turkey instead (not in the EU). This sanctions-related diversion could cause the EU headaches, given that Turkey is far more powerful than Bulgaria and Western Europe relies on Russia for 30pc of its oil and gas.

Turkstream, due to open in December 2016, also brings Athens into play. Once it’s built, the only way to get Turkstream gas to Western Europe is via Greece – generating not only transit fees, but also the prospect for Athens of Russian-subsidised gas.

It’s long been clear that Moscow could play a role in this EU-Greek stand-off by providing funds. Russia helped bail out Cyprus, after all, and the links between Athens and Moscow are deep, extending beyond commerce to culture and the Orthodox church.

The Chinese could also play a role – given the strategic importance of Greece and a general interest in seeing this euro debacle resolved. Beijing has already bought Piraeus, Greece’s third-largest port, and has lately been buying up Greek Treasury bonds.

What’s emerging now is the extent to which pipeline politics are also involved. Greek energy minister Panagiotis Lafazanis last week insisted the deal to extend Turkstream to Greece will be signed “soon”. It’s worth saying that, on my calculations, using projected gas volumes and comparable transit fees elsewhere, Greece stand to earn less than €1bn annually from Turkstream – which isn’t going to make much difference to its public finances. And the threatened extension may not happen.

Keep in mind, though, that these EU-Greek negotiations, as well as being financial in nature, are also very much geopolitical. As ERT, now back in business, will no doubt be making clear.

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