Humiliated Greece eyes Byzantine pivot as crisis deepens

Neither side holds the upper hand in the strategic game of chicken which could still see Greece forced out of the euro

By Ambrose Evans-Pritchard, in Athens2:24PM GMT 28 Feb 2015

Greece's new currency designs are ready. The green 50 drachma note features Cornelius Castoriadis, the Marxisant philosopher and sworn enemy of privatisation.

The Nobel poet Odysseus Elytis - voice of Eastward-looking Hellenism - honours the 200 note. The bills rise to 10,000 drachma, a wise precaution lest there is a hyperinflationary shock as Greece breaks out of its debt-deflation trap at high velocity.

The amateur blueprints are a minor sensation in Greek artistic circles. They are only half in jest.

Greece's Syriza radicals have signed a fragile ceasefire with the eurozone's creditor powers. Few think this can last as escalating deadlines reach their kairotic moment in June.

Each side has agreed to a deception with equal cynicism, knowing that the interim deal evades the true nature of Greece's crisis and cannot bridge the immense political divide.

They have bought time, but not much. "I am the finance minister of a bankrupt country," says Yanis Varoufakis, the rap-artist Keynesian with a mission to correct all of Europe's economic ills.

First he has to deal with his own liquidity crisis. Tax arrears have reached €74bn (£54bn), rising by €1.1bn a month. "This isn't tax evasion. These are normal people who can't pay because they are in distress," he told the Telegraph.

The Greek Orthodox Church is struggling to pick up the pieces. "The local councils can't cope, so people come to us for food," said Father Nicolaos of St Panourios parish in a working-class district of West Athens.

"We're feeding 270 people and it is getting worse every day. Today we discovered three young children going through rubbish bins for food. They are living in a derelict building and we have no idea who they are," he said, sitting in a cramped office packed with bags of bread and supplies.

"We rely on donations from the local bakery. If we run out of beans or lentils, I put out a call, and everybody brings in what they can. There is this spirit of solidarity because nobody feels immune," he said.

His poor parish in Drapetsova was built by refugees from Smyrna and Pontus, victims of the "Catastrophe" in 1922, when ethnic cleansing extinguished the ancient Greek communities of Asia Minor. He lovingly showed me the historic icons and prayer books they hauled with them in wagons, now in the church basement.

The utility companies have been cutting off the electricity as arrears rise - and sometimes the water too - leaving 300,000 Greeks in the dark. "They come and ask for candles. They can't use their fridge. They can't cook. Their children can't do their homework," he said. It is almost a description of a failed state.

Restoring electricity is the first order of business in Syriza's "Thessaloniki programme", along with food stamps, a halt to property foreclosures, and a month's extra pension for the less affluent.

Father Nicolaos urged Syriza to stand its ground. "Yes, we Greeks played our own part in our downfall, but Europe played its part too. We must not sell out at any cost, or sell our monuments to pay our debts. We must fight," he said.

Syriza has a peculiar mandate. The Greeks voted for defiance, and also to stay in the euro, two objectives that are hard to reconcile. Views are divided over which emotion runs deeper, therefore which way the inscrutable Alexis Tsipras will pivot. The boyish prime minister has yet to show his hand.

"When it comes to the choice, I fear Tsipras will abandon our programme rather than give up the euro," said one Syriza MP, glancing cautiously around in case anybody was listening as we drank coffee in the "conspiracy" canteen of the Greek parliament.

"The euro is more than just money. It is talismatic for the Greeks. It was only when we joined the euro that we felt truly European. There was always a nagging doubt before," he said.

"But you can't fight austerity without confronting the eurozone directly. You have to be willing to leave. It is going to take a long time for the party to accept this bitter reality. I think the euro was a tremendous historic mistake, and the sooner they get rid of it, the better for all the peoples of Europe, but that is not the party view," he said.

Fast-moving events may accelerate the decision. Nomura says Syriza could run out of money for basic government functions within ten days. "The risk of capital controls remains elevated," it said. Greece must repay €1.6 bn to the International Monetary Fund in March.

Alekos Flambouraris, the government affairs minister, has already begun uttering the fatal word "delay", as if were possible to delay an IMF payment without triggering a total collapse of confidence. Syriza insiders warn privately that default is becoming an alarmingly real possibility. "It is so bad that anything could happen. I can't talk any more, the phones are bugged,” said one official.

He blamed the European Central Bank (ECB) for setting off a "self-fulfilling deposit flight" from the banking system by refusing to accept Greek collateral in exchange for loans. This decision was made within days of Syriza's landslide election, and before EMU's elected leaders had issued any opinion.

The ECB's pre-emptive move is seen in Athens as counter-insurgency warfare against the first radical-Left party elected in Western Europe since 1945. It will not be forgotten lightly.

The outflows were brisk even before that. Deposit losses reached €12.8bn in January. This is showing up in the "Target2" payment data of the ECB system. The Greek central bank's liabilities to the rest of the EMU network rocketed from €49bn in December to €76bn in January as capital flight accelerated. They may have hit €100bn by now.

This is double-edged. Creditors have even more to lose if Greece spins out of control. A full repudiation of debt to the EMU institutions and states would cost over €300bn. It would be the biggest default of all time, by an order of magnitude.

Yet still Germany's Wolfgang Schaeuble pounds the table, playing to his billing in Greek demonology as the national nemesis. "Greece will not get a single euro until it complies with it obligations", he said.

There will be no fresh money before the end of April from the EU-IMF Troika, euphemistically renamed the "institutions". Nor is this guaranteed. Syriza must first demonstrate that it is actually implementing Troika demands, not just announcing them.

A bigger crunch will come when the stop-gap deal runs out at the end of June, just before Greece must repay €6.7bn to the ECB. "We're going to have four months of constant bickering and fighting with the EU institutions, and when we get to June we're going to face exactly the same blackmail over liquidity support, if not worse," said Costas Lapavitsas, a Syriza MP and an economics professor at the University of London.

Yet Syriza's leaders do not fully believe Mr Schaeuble's threats. Rightly or wrongly, their verdict on the Eurogroup meeting in Brussels is that he tried to force Greece out of monetary union but was blocked by more powerful forces, including Washington.

They believe that Chancellor Angela Merkel ordered her finance minister to desist. This occurred after Germany's Vice-Chancellor and Social Democrat leader Sigmar Gabriel demanded an end to "Diktats", and after Mr Tsipras warned Mrs Merkel in a 50-minute call that Syriza would default if pushed too far.

Greece is counting on quiet support from France and the European Commission. "There is a schism in the Troika," Mr Varoufakis told a local radio station. "We will be talking with the Commission. The EC can coordinate with the ECB if it wants."

This radio interview has caused outrage in Berlin precisely because it reveals what Syriza's leaders are telling their audience at home, and how they interpret events. Once again he repeated that there will indeed be debt relief, and "very swiftly", whatever the pro forma denials by the creditors.

Mr Varoufakis said Syriza had "vetoed" the Eurogroup demands for further increases in the primary budget surplus from 0.6pc of GDP in 2014, to 3pc this year, and 4.5pc next year - a crime against economic science, he says - and they intend to take a liberal view of what this concession means.

These demands would have been "catastrophic" for a county already in depression and without a functioning credit system, he said. The target will henceforth be "appropriate" to economic circumstances, and closer to the IMF's more dovish view of the fiscal multiplier. "This is a great conquest," he said.

Mr Tsipras told the party faithful the day after the deal that Greece had "won the battle, but not the war", inflicting the first defeat on the austerity regime. The narrative at home is that right-wing forces in Europe had attempted to crush their democratic revolution at the first pass, and had been checked.

There was a revealing episode afterwards when ageing composer Mikis Theodorakis wrote an open letter to Mr Tsipras exhorting him to defy Mr Schaueble and throw out the "Bavarians". He was evoking a deep historical grievance, decrying the Wittelsbach dynasty that was imposed on Greece in 1833 by foreign powers - without seeking Greek consent - and which quickly bankrupted the young state, but not before it had obliterated Greek customary law and "disfigured" a Byzantine nation.

Mr Theodorakis alleged "two centuries of European crimes against Greece," implicitly calling for for a civilisational divorce from the Western enemies of the Hellenic Orthodox world. Mr Tsipras could have ignored it. Instead, he called to congratulate the old lion, inviting him to the presidential palace the next day. Such reflexes are being watched closely by Berlin, and by Moscow.

Mr Tsipras is of course walking a fine line, even if his approval rating has surged to 87pc. The first anti-Syriza riots tore through the Exarchia district of Athens on Thursday night as hooded anarchists hurled Molotov cocktails and fire-bombed a car to protest the EMU "sell-out".

Less visible, but more threatening, are powerful forces within the economic oligarchy who are starting to question whether they might not do better protecting their vested interests outside the euro, shielded from EU scrutiny. They have links to the military, police, and security apparatus.

Mr Varoufakis said the latent danger is the far-Right. "If pro-European and democratic governments like ours are asphyxiated, and voters are driven to despair, the only people who will benefit are fanatics, racists, nationalists, and all those who feed on fear," he told France's Charlie Hebdo.

For now it is quiet in the working-class Nikaia district of West Athens where a rap-singer was clubbed to death on the streets by militias from the Fascist Golden Dawn party in 2013. Yet it would be unwise to take this for granted.

The municipality had 30 families registered as poor and needy in 2009. This rose to 330 in 2011. It is now 1,350. "They have no money left," said Michalis Fiorentis, a veteran poverty-fighter for the council.

"The recession finished off the small leather and clothes factories in this quarter. People lost their jobs, their shops, their family insurance, and spiralled into debt, all at once."

Mr Fiorentis confesses that there is very little that his under-funded office can do to mitigate the distress. With no illusions, he gives Syriza his acid blessing. "If they don't tell as many lies as the last government, that would be a start."

Mr Tsipras is juggling agendas, so far with remarkably steely nerves and sang-froid for such a young man. He survived a stormy 10-hour debate of the Syriza caucus this week, with just five MPs voting against the EMU deal. Yet the criticisms over the Brussels deal were blistering. Panagiotis Lafazanis, head of Syriza's 'Left Platform', said his forces will not accept any retreat from a "radical left orientation".

The prime minister is heeding the warnings. Privatisation of the power utilities, airports, and ports have been cancelled or face drastic review, leaving only "completed" deals in tact. This a minimalist reading of the text signed in Brussels, another sign that Syriza has no intention of buckling to Mr Schaueble's very different hermeneutics.

"We will cancel the privatisation of the Piraeus Port," said George Stathakis, the economy minister, wearing the trade-mark leather jacket of the movement. He is a Marxist economist, yet also the British-educated son of a Cretan shipping magnate, the two sides of Syriza.

"It will remain permanently under state majority holding. There is no good reason to turn it into a private monopoly," he said. Indeed, the port generates an income for the state. Syriza suspects that the chief reason why the Troika is pushing €25bn of fire-sales into a depressed market is to collect debts for the creditor powers, for it makes no other sense.

The parallel with the International Committee for Greek Debt Management in 1898 is lost on nobody. The six-power league of bondholders seized customs duties in the Port of Piraeus, and took over revenues from stamp duty, tobacco, salt, kerosene, and even playing cards.

A veteran EU diplomat in Athens said the Troika is so determined to extract money that it has turned a blind eye to some of the dubious deals tailored to the interests of powerful oligarchs. "The sales are a stitch-up, all going to the same small circle. We know exactly who the biggest smuggler of shipping fuel is, and why nothing has been done. He was very close to the previous government. Syriza are not part of this system and don't have 'checks to pay back'," he said.

It is this debt collector's agenda that has fed contempt for the word "reform" in Greece. The Greeks know from leaked IMF minutes that their country was sacrificed in the first bail-out of 2010 in order to save the euro and Europe's banks at a time when EMU had no defences against contagion. “Debt restructuring should have been on the table,” said Brazil's IMF member.

Instead the Troika foisted more debt onto Greece, roping EMU taxpayers into what should have been a dispute between the Greek state and private bondholders. “Europe in its infinite wisdom decided to deal with this bankruptcy by loading the largest loan in human history on the weakest of shoulders, the Greek taxpayer. What we’ve had ever since is fiscal waterboarding," said Mr Varoufakis.

The government has cut its wage bill by a third in five years. Public sector jobs have fallen by 170,000. Average pay has fallen 22.5pc. Yet the debt has spiralled up, from 157pc in 2012 to 182pc last year.

Such is Greece's Sisyphean Task. The ferocity of the fiscal cuts - without monetary stimulus, or the usual devaluation and debt relief in IMF packages - has caused the economy to contract by a quarter, shrinking the base that must carry the debt burden. Gains from austerity have been overwhelmed by more powerful debt-deflation forces. The IMF has admitted in a mea culpa that the Troika exceeded the therapeutic dose for fiscal tightening.

Greece is now told it must to cut the debt to 124pc of GDP over the next five years to comply with the Troika memorandum. It is the Big Lie of the Greek bail-out, perpetuated by the creditors to deceive their own democracies at home. The economy minister shrugged his shoulders and laughed when I asked him how his country planned to meet this patently absurd target.

Syriza hoped to end the charade by securing allies in Southern Europe with calls for an EMU-wide debt conference modelled on the London Accord of 1953, which cleared the way for post-War recovery. Here they over-reached. The insidious effect of the bail-out is that Greece now owes the money to Italian and Spanish taxpayers, among others, vastly complicating the political landscape.

In any normal contest with creditors, Syriza's position would be hopeless. But nothing about this episode is normal. If EMU were to force Greece out of the euro by withdrawing bank liquidity and deliberately causing the collapse of the Greek financial system - to which the ECB has a duty of care under EU treaty law - they would create a martyr state for the whole European Left.

They would violate the sanctity of monetary union and risk reducing it to a fixed exchange "ERM3", inviting an attack on the weakest link to follow. The EU's extraordinary experiment in solidarity would lie in ruins.

The Western security system would the face turmoil in the Balkans. It would have to deal with an embittered state - hostile to Nato, and willing to play the Russian card - along an arc of instability stretching from Ukraine, though the Levant, to North Africa. That is why US President Barack Obama has intervened, pleading with Chancellor Merkel to avert the worst. The stakes are too high for finance ministers.

It is far from clear who really has the upper hand in this game of strategic chicken. Both sides can reasonably calculate that the other will blink first at each deadline to come. One of them is wrong. That is what makes this drama so riveting, and so dangerous.