The trust gap on Greece

By Matthew Karnitschnig

As another week of dueling reform proposals, recriminations and hours of discussions on Greece’s future draws to a close with no resolution in sight, hope for an 11th-hour deal hinges less on substance than trust.
Put simply, creditors have little faith Greece’s leftist government can deliver the laundry list of reforms they have put on the table. Athens, meanwhile, is convinced creditors are making draconian demands aimed at driving the government from power.
“I am kind of fed up with everything,” a despondent Greek official said after Thursday’s meeting of eurozone finance ministers ended without progress. “You don’t need to be an economist with five PhDs to know that this isn’t going to work, I’m talking about the strong demand of making it all so difficult and imposing so much — I’m afraid we’re going to be in a very bad situation again.”
Once again, about the only thing the two sides could agree on is to meet again, this time on Saturday. By then, they hope their teams can marry the German-inspired creditor proposal with €11 billion in spending cuts with Athens’ own blueprint for economic renewal.
Athens argues it can meet the fiscal targets creditors have set by raising taxes on everything from gambling to corporations. Even if Greece had the ability to collect those taxes (recent history suggests it doesn’t), creditors worry that the strategy would plunge the economy even deeper into recession. A weaker economy equals lower tax revenue.
The only way to save Greece, creditors argue, is to slash government spending. Unlike tax revenue, which fluctuates with the economic cycle, budget cuts can be enforced and allow for more precise planning.
In recent weeks, Greece has often dragged its feet during the negotiations, playing down the clock in the hope of winning concessions. The strategy met with some success. But German officials say they can’t move any further in Greek Prime Minister Alexis Tsipras’ direction. As a Tuesday deadline for a deal nears, it’s now the creditors who are using the clock against Athens.
German Chancellor Angela Merkel said after the first day of the summit, where Greece failed to make headway with its proposals, that a meeting of finance ministers on Saturday was of “vital importance,” stressing that it was up to the technical experts rather than national leaders to resolve the outstanding differences.
European Council Donald Tusk said he didn’t anticipate another special summit on Greece over the weekend.
Athens will have to climb down from its demands or embrace a future outside of the eurozone.
Greece’s bailout expires on Tuesday. If it doesn’t reach an agreement allowing it to tap the remaining €7.2 billion by then, the money evaporates and Athens won’t be able to pay off its loans. The ECB may also decide to cut off emergency liquidity for Greek banks. The assistance has kept Greece’s banks afloat in recent months but is reserved for countries in a bailout program.
Jens Weidmann, the head of Germany’s influential Bundesbank and a close adviser to Merkel, said on Thursday that he had “serious” concerns about continuing the aid. He suggested the support may constitute illegal central bank financing of a government.
Athens took those words as a threat to let Greece’s financial system collapse if the government doesn’t back down. Greeks say such comments are to blame for the poisoned atmosphere between Athens and its creditors.
Those tensions were in the room this week between Greek Finance Minister Yanis Varoufakis and his counterparts from northern Europe. The bombastic Greek minister, who often shows up to meetings late with the collar of his sport jacket turned up, has aggravated his colleagues with long speeches on macro-economic theory and the perils of austerity.
“Everyone always says it’s not personal,” one of the officials said, “but ultimately that plays into things.”