Varoufakis’ tough refusal on any Troika interference in Greece’s rescue plan at the Eurogroup last week was openly disavowed by his Prime Minister only 24 hours later. With Tsipras agreeing with Dijsselbloem on a monitoring to be undertaken by the “institutions” (namely EC, IMF and ECB), this U-turn did not even amount to a face-saving substitute for the Troika.
Yet, on substance, both sides still show deep divergences. While Tsipras attempts to scrap the current austerity measures, his partners are adamantly opposed to relaxing fiscal discipline. They also disagree on Athens’ drive to cut short any privatization plan. EU creditors may be ready to adapt to the rescue package, which would allow extra breathing space for budgetary consolidation, so long as this goal doesn’t derail the overall proposal. They fear that implementing electoral pledges could lead to further deterioration in public finances, especially if the new government proves unable to convey confidence to economic agents.
But the main stumbling block is the Greek refusal to accept a roll-over of the current rescue package. EU partners have flatly rejected Varoufakis’ demands for temporary relief until negotiations over debt restructuring are completed. With time is running out, Greece faces the awesome prospect of potential bankruptcy and liquidity failure.
In the absence of any agreement before the end of this month, Greek banks would be unable to withstand a run on their cash while public finances will no longer be able to meet obligations. Only a Grexit allowing the national bank to provide unlimited finance on domestic currency could save the country from utter implosion.
As the stakes rise, investors are bound to flee for safety and sell-off risky assets- a move that could lead to complete disarray in the euro area. Attempts by other countries to ring-fence themselves against such a threat might prove futile should turmoil and panic gather momentum.