Varoufakis’ proposal to swap outstanding liabilities for growth-related bonds is the only chance taxpayers may get their money back, even if it takes longer than expected. On this issue, Greece might hold the line until the very end, as long as its financial system does not collapse. Draghi holds the key to avoiding that nightmare scenario. He holds the winning cards; it remains to be seen if he decides to play them.
Debt restructuring has become the main battleground in the current tug-of-war between Greece and its European partners. Each side believes it can resist the pressure while forcing the other to come to terms. Underestimating Athens’ resilience might prove to be an error, as a Greek bankruptcy would wildly backfire by hitting vulnerable countries and sapping confidence in the euro. Tsipras may resist the demands asked of him, fully aware that any damage inflicted on the Greek economy would severely hamper recovery in Europe. His only real weakness lies in a banking system unable to endure a crisis unless the ECB staunchly supports it.
Draghi holds the winning cards in this game. He already made it clear that bond buying would require Greece to fulfil its obligations under the rescue package. Central bankers are unlikely to back down as any concession on political grounds severely undermines their credibility. Trust Draghi to stand firm on this issue.
The risk that a fully fledged crisis may unfold might prevent Draghi from taking a thoroughly hawkish stance. Should the Greek financial system implode, he knows that the shock waves would hit neighbouring countries. He cannot ruin a euro zone member while preserving the security of the area as a whole, irrespective of how well the continent can ring-fence itself against the Greek problem.
Contagion seems inevitable. Up to now, he has remained silent but, soon, journalists will press him on the course of ECB action. Even if he skilfully skips questions on future potential scenarios, he has no other option than to admit that full adherence to the rescue package will be the key condition for any support. As the current talks drag on, the risk of financial disarray will force Tsipras to compromise. He can manage pending debt and Greek financial needs for months to come. Yet, he cannot resist a liquidity crisis rapidly turning his country’s economy into shambles.