There is little chance today’s Eurogroup meeting will bridge divergences between Schäuble and Varoufakis. The German Minister seems all too aware that accepting an unconditional extension of the rescue package would provide ample room to the Greek government to drag its feet until current reforms are stripped away. Mr Varoufakis fears that accepting the present conditions will cut short his ability to broker a better deal.
The likely outcome of this angry showdown is another collapse of talks. After all, Greece has an extra week to make more committal statements in its request for an extension. The country can even resist for at least one more month before facing payment default. Even if the worst scenario materialized, bankruptcy would severely hit creditors and the standing of the euro. Mr Varoufakis has bet on his colleagues caving after the protracted negotiations. His weakness lies in the banking system´s resilience-or lack thereof. Should implosion occur, deposit controls or the Grexit option would automatically ensue.
Thus, the key to the Hellenic imbroglio lies in the ECB’s hands. Should it cut loan facilities in the absence of a rescue extension deal, Greek banks could not withstand the onslaught. Deposit depletion plus the sovereign crash would force default unless tough controls are enacted or Tsipras takes his country out of the Eurozone. It is an unpalatable decision for Mr Draghi and his colleagues to take.
They can exert extra pressure on the Greek government by forbidding any financing to it. Yet, they grow increasingly uncomfortable when faced with cutting short the Emergency Loan Assistance scheme for the credit institutions. On paper, they cannot provide extra lending unless the beneficiaries’ solvency seems reasonably anchored. That prospect would likely crumble should the government go bankrupt and bringing bank balance sheets to utter collapse. The Greek government can pursue its tug-of-war in the weeks to come. Yet should the domestic financial system blow into pieces, it will be forced to surrender in a couple of days. Guess who holds the winning cards in this gamble.
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