By the standards of his frenzied schedule here last week, the meeting on Friday last week between Greek Minister of Finance Yanis Varoufakis and Lee Buchheit, dean of international debt lawyers, was a quiet one.
There was none of the media scrum that had followed Varoufakis around town during the semiannual meetings of the IMF and World Bank, as he paid calls on IMF managing director Christine Lagarde, European Central Bank (ECB) President Mario Draghi, US Secretary of the Treasury Jack Lew and even US President Barack Obama.
However, the get-together with Buchheit carried critical meaning, according to experts in Washington. After all, it was Buchheit who helped broker Greece’s most recent debt refinancing in 2012.
Illustration: Mountain people
As Greece now gropes for a resolution to its current financial problems, the meeting suggests that Athens might still be holding out hope for a restructuring of its debt burden of 303 billion euros (US$323.9 billion).
What Varoufakis and Buchheit discussed is not publicly known, and neither would comment on the meeting. However, that Varoufakis might still be exploring a restructuring underscores just how close Greece is to defaulting on its staggering debt, billions of euros of which must be repaid in the coming weeks.
As the eurozone braced for the prospect of a default, financial markets were jittery last week and Greece’s own short-term borrowing costs were soaring. Repercussions of such a default are so difficult to predict that European officials have spent the last five years trying to avoid one.
Over the weekend, senior European officials said that, while the Greek debt situation was dire, they still believed an agreement would be reached. And the US, starting at the top with Obama, is engaged in pushing both sides to come together to prevent a market-rattling default.
After two international bailouts for Greece since 2010, about 90 percent of its debt is owed to its eurozone neighbors, the IMF and the ECB. At the moment, not one of those lenders is showing a willingness to give any additional payback relief to Varoufakis and the new left-leaning government in Athens.
Varoufakis’ next formal meeting with his country’s creditors is set for Friday in Riga, Latvia, where eurozone finance ministers are to assemble for their monthly gathering. German Minister of Finance Wolfgang Schaeuble said in Washington last week that no one should expect the meeting on Friday to resolve anything.
Unless the creditors soon agree to release the next allotment of bailout money, Greece could have trouble making a US$763 million payment to the IMF on May 12. It almost certainly would not be able to meet the 11 billion euros in payments to the ECB, the IMF and on US Treasury bills in June and July.
Varoufakis’ main message in Washington was that Greece was doing its best to implement painful economic overhauls demanded under the bailout program, while also remaining true to the government’s anti-austerity mandate.
“We know we are bound to a program,” Varoufakis said in an interview late last week, before his private meeting with Buchheit. “[However] there is another principle here: democracy.”
However, the Greek government and its lenders remain far apart. Many European and IMF officials are openly complaining that Varoufakis is expending too much energy as a celebrity economist — he was a top draw at a panel discussion last week at the Brookings Institution — than on coming up with a viable plan to satisfy creditors.
In particular, Europe and the IMF are furious that Greece has still not changed its generous pension system. Varoufakis has even gone in the opposite direction by increasing pension payments to lower-income workers.
“We still do not have a comprehensive, detailed plan,” one of Greece’s most senior creditors said last week. “Plus, the numbers just do not add up.”
The official spoke on the condition of anonymity.
Buchheit, a lawyer at Cleary Gottlieb Steen & Hamilton, has for more than 30 years represented governments that are unable to pay their debts. He was the brains behind Greece’s 200 billion euro debt restructuring in 2012, when the specter of a Greek default — and the potential that a nation might be the first member to leave, or be forced out of, the euro currency union — had the eurozone in a state of crisis.
The plan brokered by Buchheit, which required many private holders of Greek debt to accept big losses as part of the refinancing, was a last-minute resolution.
For now, Greece is living hand-to-mouth. It has been dipping into the reserves of various state bodies to pay monthly pension and wage bills. A senior official in the Greek Ministry of Finance said there was about 2 billion euros of cash left to tap in this regard and the government should be able to finance itself through Friday.
When Varoufakis flew on short notice to Washington on Easter Sunday to ask Lagarde for some payment flexibility, he said publicly that Greece intended to meet its obligations. The statement at the time was taken as a commitment by Greece to do whatever it took to pay the IMF and others.
However, privately, Varoufakis told colleagues in Washington last week that he purposefully used the word “intend” as opposed to “will” in his public statements on Greece’s payment plans, according to people close to Varoufakis who spoke on the condition of anonymity.
Varoufakis is also well aware that if Greece continues to meet its payment schedule as currently mapped out, it will end up paying about 12 percent of its GDP to its creditors during his first term as finance minister.
He has said that such a dynamic is not sustainable for a left-wing government elected on a platform of putting the interest of Greece’s electorate before its creditors. The country was just emerging from a deep recession before the January elections and is thought to be slumping back into one.
Meanwhile, European creditors and the IMF have made it clear that they will not accept a delay in payment or a simple forgiveness of part of the debt — the sort of “haircut” Buchheit persuaded private holders of Greek debt to accept in 2012.
“In practical and political terms, a nominal haircut for Greece is ruled out,” Eurogroup President and Dutch Minister of Finance Jeroen Dijsselbloem, who represents European creditors, said in an interview on Friday.
However, many outside experts are saying that the cycle of creditor-imposed austerity in Greece must stop and that the only clean way to alleviate it would be through a significant debt cut.
“Greece’s official sector debt should be forgiven,” said Ashoka Mody, a former senior economist at the IMF who oversaw the fund’s austerity program in Ireland. “And we really need to get rid of this Washington-Berlin-Brussels supervision of Greece — this is the most corrosive part of the arrangement, and it undermines both Greece and Europe.”
Even if Varoufakis and Buchheit did discuss some sort of a refinancing when they met, it is not certain that Buchheit would be able to wield much influence this time around. Although he has done some public sector debt restructurings, Buchheit is better known for forcing private sector bondholders to accept losses.
In 2012, such bondholders held a majority of Greece’s debt. This time, private investors own just 10 percent of Greece’s bonds. Their taking “haircuts” would not provide much help.
However, for Varoufakis, that the world’s leading debt default lawyer appears to be advising him sends a powerful signal.
Since becoming finance minister, Varoufakis has been wagering that Europe — and German Chancellor Angela Merkel in particular — will not want to be blamed for forcing Greece into default and out of the eurozone.
With the debt clock ticking, and Greece fast running out of cash, the coming weeks is to reveal the wisdom of that bet.
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