Renegotiation Of The Greek Bailout? Don't Count On It

by: George Liu

The past few days have been pretty eventful for Greece's nascent coalition government which, now established, is seeking space to maneuver in following the bailout terms established by the troika (made up of the European Commission, European Central Bank, and IMF). A few days ago, Greece announced the extent to which it desired to renegotiate the terms of the second bailout from the troika.

Some of the main components of the blueprint of the Greek coalition government are proposals for the extension of Greece's "fiscal adjustment period" by at least two years, the cancellation of planned layoffs in the public sector, and the reduction of the value-added tax on food to 13 percent from 23 percent.

The Greek government's desire for renegotiation of bailout terms potentially sets up a showdown with the troika, which is the major factor standing between Greece and a disorderly default; without funds from the troika to operate, Greece would probably have no choice but to exit the euro. Although the troika has indicated a willingness to renegotiate the terms, troika leaders have repeatedly stated there is "only marginal room for maneuvering."

So which side will prevail? My bets are on the troika succeeding in only allowing minor renegotiations. Although austerity has had at best mixed results in Greece, the troika has signaled its willingness to continue utilizing this approach of "fiscal responsibility."

It also should be noted that the major party of Greece's new coalition government, New Democracy, was actually elected on a campaign platform pledging to keep Greece in the Eurozone. In fact, during election campaigning, New Democracy often capitalized on the fears of Greeks by portraying the major opposition party, SYRIZA, as one which, if elected, would force Greece out of the Eurozone. Renegotiation of the bailout terms was actually the campaign platform of the SYRIZA party led by Alexis Tsipras. With its campaign promise in mind, New Democracy and the Greek coalition would be hard-pressed to find significant leverage to persuade the troika to agree to their major terms. One of the foremost concerns of the new Greek coalition is to ensure Greece's membership in the Eurozone, even if this necessitates capitulation to the demands of the troika.

The prospects of the coalition's success were dim to begin with, but now they seem to have gotten even dimmer. On Monday, the newly appointed Greek finance minister, Vassilis Rapanos, announced his resignation from office. Moreover, the leader of the new coalition and the prime minister of Greece, Antonis Samaras, is recovering from emergency eye surgery; he will be absent from the eurozone summit that will be held from June 28-29.

The absence of two of Greece's most important officials from the summit will definitely decrease Greece's chances of persuading the troika to accept a major renegotiation of the bailout terms. Moreover, eurozone summits, historically, have not proven to be particularly productive; even if the troika is persuaded to look at its terms of austerity from the Greek standpoint, it is an entirely different matter to turn this persuasion into solid action.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.