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Why Germany Rejected Greece's Peace Offering

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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The optics of today's events in Europe, admittedly, were bad. Greece seems to have come crawling to its creditors asking for an extension of its current bailout -- something it has resisted doing for weeks -- only for Germany to arrogantly dismiss the request. 

From the German point of view, however, that's not what happened at all. Berlin believes Greece's radical leftist government is trying to weasel out of the bailout program by asking for an extension of just one of the legal documents that frame it, instead of the whole package. As far as German Finance Minister Wolfgang Schaeuble is concerned, this isn't a real compromise. And he has a point.

Here's what the letter Greece sent today to the group of finance ministers of euro area countries says:

In this context, the Greek authorities are now applying for the extension of the Master Financial Assistance Facility Agreement for a period of six months from its termination during which period we shall proceed jointly, and making best use of given flexibility in the current arrangement, toward its successful conclusion and review on the basis of the proposals of, on the one hand, the Greek government and, on the other, the institutions.

The agreement in question spells out how Greece's funding is disbursed and repaid. It's a lengthy legal document that makes no reference to any policy commitments Greece must make in order to receive the bailout funds. These were set out in separate programs, which the Greek parliament approved to get the bailout funding released. 

Last Monday, Greek Finance Minister Yanis Varoufakis talked to the Eurogroup about bridging Greece's financial gap until a new bailout deal could be worked out. While signaling he wanted to keep the terms of the Master Financial Assistance Facility Agreement, he explained, in a speech whose text has since leaked, which reforms his government planned to continue implementing and which it didn't. He said he couldn't commit to Greece's previous privatization promises because of collapsing asset prices. He also objected to his predecessors' agreements on labor reforms and primary surpluses.

The Eurogroup, however, was resolved to hold Greece to the entirety of the previous deal, not just the part dealing with the disbursement and repayment of money. The wording of a draft Eurogroup statement that Greece apparently rejected on Monday referred to "the current program," not the Master Financial Assistance Facility Agreement. 

This would explain today's statement from German finance ministry spokesman Martin Jaeger: "The letter from Athens is not a substantive solution. In truth it aims at bridge financing without the requirement to fulfill the program. This does not meet the criteria approved by the Eurogroup on Monday".

Here's how Holger Schmieding, chief economist at Berenberg Bank, explained it in a research note today:

Whether or not extending the “master financial assistance facility agreement” comes close to asking for an extension of the “current programme” is a matter which lawyers can discuss for ages. The financial assistance agreement itself does refer to full conditionality in its section about any disbursement of funds. But if Greece does not request any further disbursement of funds under the agreement, it may argue that it does not subject itself to full conditionality upon extending the loan agreement. The Greek request hence invites the interpretation that it wants to extend the assistance agreement solely as a basis for the ECB to keep Greece afloat.  

In other words, the German finance ministry fails to see what the government of Greek Prime Minister Alexis Tsipras is giving up. It still wants a new deal on its debt (which is not even under discussion yet) and it's still rejecting previously approved reform programs. Extending the bailout agreement on such terms would simply give Tsipras more breathing space to seek a debt write-off, as he originally intended. It would also give him a boost with the Greek electorate, which would undoubtedly be impressed with its government's success in negotiating with the fearsome Germans.

Schaeuble and the other Eurogroup finance ministers are not against giving Tsipras the six-month extension, but they want assurances he will behave throughout that period as though he were someone else -- for example, his far less radical predecessor Antonis Samaras. Putting the millstone of the previous programs around Tsipras's neck would have the added benefit of playing well with German and other Central European voters. German Economy Minister Sigmar Gabriel said today he was glad Greece was ready to negotiate, but it couldn't be allowed to distribute the costs of its social policies to other countries in the euro area: "We can't explain to Slovak citizens why the minimum wage in Greece is twice as high but Slovak taxpayers should make transfers to Greece."

I still believe Germany will eventually make concessions to Greece to keep it in the euro area, but it is clearly determined to extract a price for its generosity. At the least, Berlin wants to force Tsipras and his team to give up most of their radical leftist ideas -- they might even want to drive them out of power in the process.

Contrary to the prevailing sense of urgency, there's time for more tug-of-war. "Deadlines are not firm in Europe," Schmieding notes, so even after Greece's current bailout runs out on Feb. 28, the world will not end: the ECB can still fund Greek banks and the country can hold off its creditors while talks with the Eurogroup continue. Expect more brinkmanship on both sides in the coming days -- and more meaningful concessions from Greece.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor on this story:
Cameron Abadi at cabadi2@bloomberg.net