Greek Finance Minister Heads to Germany After Retreating From Tough Stance

By James Hertling

 (Bloomberg) -- Greek Finance Minister Yanis Varoufakis arrives in Germany with the wind at his back: the biggest rally in stocks since the days of the drachma and a plunge in the week-old government’s borrowing costs.

All he had to do was drop a demand for a debt writedown, retreating from a central campaign promise.

Now, following stops in Paris, London and Rome, he’ll encounter European Central Bank President Mario Draghi and German Finance Minister Wolfgang Schaeuble, who hold the keys to whether Greece gets the time and financial support needed to negotiate the new bailout deal it’s seeking with fellow European Union leaders. There may not be a meeting of the minds.

“Both sides have to take extreme views because it maximizes their bargaining position,” said Patrick Armstrong, chief investment officer at Plurimi Investment Managers in London, which oversees about $2 billion. “You have to show the end of the world ‘if you don’t agree with me.’ So we’re in for a lot of rhetoric and volatility for the next month.”

Underscoring the volatility, the benchmark Greek stock index has surged more than 16 percent this week, the biggest two-day rally in 24 years. The gauge plunged 14 percent last week amid concern Alexis Tsipras’s newly elected government might take unilateral steps that would endanger Greece’s euro membership. Ten-year bond yields dropped 143 basis points Tuesday to 9.5 percent; on Monday, they opened above 11 percent.

New Terms

After last week’s convulsions, the premier issued a statement Saturday saying obligations to the ECB and International Monetary Fund would be paid and that he expected a deal with the euro area on new bailout terms. And on Monday, Varoufakis outlined plans to swap some debt owned by the ECB and the European Financial Stability Facility for securities, some linked to the country’s economic growth.

A six-week bridge agreement starting at the end of the month could be the first step toward a more comprehensive accord that might be reached in June, Varoufakis told Italy’s Ansa newswire on Tuesday.

Waiting Game

German officials were not as impressed as the markets.

“The Greek government is still working on its position,” Chancellor Angela Merkel said. “That’s more than understandable considering the government has been in office for a few days.”

Germany expects talks with Greece to drag on until after the current round of bailout funding runs out at the end of the month and is prepared to play a waiting game until April or May, when the country approaches a cash crunch, a person familiar with the matter said.

“There are new proposals and new reports coming out of Greece all the time and all of Europe and beyond seems to be holding its breath,” said Volker Kauder, caucus leader for her Christian Democratic-led bloc in the German parliament. “The new Greek government doesn’t create any trust this way.”

Draghi’s Power

Varoufakis, who meets Draghi Wednesday morning in Frankfurt and Schaeuble in Berlin the next day, has declined to offer details on his debt-swap thinking. “You will allow me not to go into details at the moment,” the economics professor told reporters in Rome. “This is not the time for financial-engineering lectures.”

Earlier, he tweeted: “Debt will be rendered sustainable, even if we replace haircut with euphemisms and swaps.”

For now, Draghi’s ECB has the power of life and death over Greek banks via financing available because of Greece’s compliance with its bailout program. It runs out on Feb. 28. After that, lenders can rely on emergency-liquidity assistance from the national central bank in Athens, which the ECB has to review every two weeks.

Greek Demands

The ECB Governing Council can intervene only to restrict the funding, with the decision requiring a two-thirds majority of governors. That’s unlikely to come before a meeting of European finance ministers in Brussels on Feb. 16-17, where Greek demands will be on the table.

Emergency funding to Greek banks “is something where we have very close interlinkages with political events,” Ewald Nowotny, governor of Austria’s central bank, said on Monday. “We will follow our rules.”

It’s urgent because deposit flight accelerated before Tsipras’ Jan. 25 election. Greek banks lost at least 11 billion euros ($12.5 billion) in deposits in January, according to four bankers who asked not to be identified because the data were preliminary. The outflow was about 4 billion euros in December. Total deposits were 160.3 billion euros at the end of 2014.

Austerity First

The new Greek government’s priorities are at odds with Germany’s austerity-first conditions for bailout commitments, which total 240 billion euros. Tsipras has promised to raise wages and pensions, end public-sector firings and stop state asset sales -- all policies that would breach the conditions on the bailout aid.

Merkel’s room for immediate maneuver is also limited. She is preparing for state elections in Hamburg in February and in Bremen in May and fending off challenges from anti-euro party Alternative for Germany.

“Reality is about to bite: Tsipras will realize that the constraints are very tight,” Kevin Featherstone, professor of contemporary Greek studies at the London School of Economics, said in an e-mail. “It seems certain that the euro zone will insist on Greece committing itself to continued structural reform.”

(A previous version of this story corrected the spelling of Varoufakis in the headline.)

To contact the reporter on this story: James Hertling in Athens at jhertling@bloomberg.net

To contact the editors responsible for this story: Ben Sills at bsills@bloomberg.net Zoe Schneeweiss

http://www.bloomberg.com/news/articles/2015-02-03/vanoufakis-heads-to-germany-as-markets-bless-debt-retreat