Ten days that shook the euro; how Greece came to the brink

The «rock star» took on the rock. And the rock won.

Germany’s Wolfgang Schaeuble, the «immovable object» in the words of one economist, stopped Greece’s charismatic new finance minister Yanis Varoufakis in his tracks, forcing Athens to extend a bailout programme on Friday on terms its government was just elected to get out of.

It was not just German opposition. The new Greek found itself without a single firm ally among 18 euro zone peers in its drive to reverse austerity and renegotiate its debt pile.

The 10 days it took to strike a deal featured a shambolic round of U-turns, leaked drafts and personal slights while panicked savers withdrew money and pushed Greek banks close to failure, forcing Prime Minister Alexis Tsipras to step in over Varoufakis’s head.

More than that, the confusion officials recounted from behind the scenes left mutual trust in such tatters that it casts doubt on whether the four-month bailout extension will lead to an agreement over how to keep Athens solvent.

So short had goodwill become that when Varoufakis sent a letter on Thursday requesting an extension to the bailout he had long resisted, in language that to non-lawyers sounded close to total capitulation, German negotiators quickly shot it down as a «Trojan horse», worded to wriggle out of conditions.

The principal actors played down personal animosities during the talks; Varoufakis took pains to apologise to Schaeuble for a Greek newspaper cartoon that depicted the 72-year-old former tax lawyer as a Nazi demanding to boil Greeks down for soap.

But a series of trips to Brussels to hear about the evils of austerity from the casually dressed left-wing academic blogger – «a bit of a rock star» in the words of Ireland’s minister – stretched patience thin.

When Varoufakis, 53, strolled in an hour late with a cameraman in tow to last Monday’s finance ministerial meeting, witnesses said Schaeuble’s scowl and sharp words from Dutch chairman Jeroen Dijsselbloem set the tone.

At a previous meeting five days earlier, the wheelchair-bound German waited in an underground car park while the Greek minister phoned Tsipras for approval after Varoufakis had struck a deal that the other 18 thought was final.

Still believing an agreement was in the bag, Schaeuble flew home to Berlin, only to find on landing in the early hours that the Greeks had changed their minds and they were back at square one.

Even those who fretted Berlin was pushing Tsipras too far to renege on campaign promises concede the novice government in Athens did itself no favours by demanding World War Two reparations and not giving a clear account of its plans.

In a heresy against the «no Grexit» credo Schaeuble intoned in public, Maltese Finance Minister Edward Scicluna said of the Germans last week: «They’ve now reached a point where they will tell Greece ‘if you really want to leave, leave’.”

Most of Europe still recoils from the disruption and loss of confidence in the euro that «Grexit» might entail. It was enough to persuade German Chancellor Angela Merkel to back the 240-billion-euro (178 billion pounds) bailouts and still seems to sway her thinking.

But with Tsipras, untried 40-year-old leader of the leftist Syriza party, wielding a mandate to ease the debt burden and boost spending, leaders are concerned Greek finances could yet run out of control as repayments fall due.

“The biggest threat to Greece was that their banking system would go belly up next Wednesday,» said Irish Finance Minister Michael Noonan, describing Friday’s deal as a stopgap measure.

Schaeuble called it a «date with reality» for Tsipras which he would struggle to explain to voters whose hopes he raised.

Even as Tsipras was telling Greeks that «we won a battle» if «not the war», Noonan was telling Irish voters, who have also suffered grievously under a bailout programme, that Varoufakis’s combative style had secured «absolutely nothing … that could be considered a concession».

Athens’ approach may even have cost it some flexibility, as Schaeuble and his officials demanded ever tighter drafting of terms to stop Greece smuggling in semantic loopholes.

Claim and counter-claim

It all started more promisingly. Euro zone finance ministers first sat down with the Greeks on Feb. 11, two weeks after the government was formed, to work out a plan before the bailout programme ran out at the end of this month. Varoufakis seemed to be on a charm offensive to calm nerves.

Christine Lagarde, the French conservative who heads the IMF, Greece’s other main creditor, called Varoufakis «competent and intelligent».

Four hours later, ministers headed home, saying a joint statement would set up a final agreement.

It was not to be. Varoufakis, a political independent who one EU official labelled “a communist in a Burberry scarf», had to check with Tsipras to ensure he could carry his coalition behind the deal. Tsipras said no.

As Schaeuble flew back to Berlin, Dijsselbloem, the Eurogroup president, had to announce to a much delayed midnight news conference that, in fact, there was no common statement.

With money starting to flow faster out of Greek banks, the next day EU leaders sat down for the first time with Tsipras at a scheduled summit to which Merkel and French President Francois Hollande had flown after all-night Ukrainian negotiations in Minsk.

They gave their new Greek counterpart the floor. He pleaded for a break from austerity for his people. Merkel and others insisted they would not pre-empt the finance ministers’ talks.

After both sides’ technical experts worked over the weekend to find common ground, a frisson of elation rippled through the Greek camp before another round of ministerial talks began on Monday, Feb. 16. That proved another false start.

As Varoufakis told it later, he had been on the point of signing a draft offered by Pierre Moscovici, the French former finance minister who is now EU economics commissioner. But when he strode in to the negotiating room, Dijsselbloem handed him an entirely different text.

As with many of the specific moments of the 10-day crisis, accounts vary among those present. Greek officials spoke of an attempt to «trick» Varoufakis and of sharp words in the room.

The European Commission said Moscovici «contributed ideas» in a discussion with Varoufakis but said there was no Commission proposal separate from that put forward by the Eurogroup.

Either way, euro zone ministers said it was now up to Athens to request an extension before a further meeting on Feb. 20.

Noting the bailout expiry would cut Greece off from funds, Schaeuble said: «On Feb. 28, at midnight, it’s over.”

With Greek bankers watching capital flee, the European Central Bank kept them on a tight leash of emergency liquidity.

By Wednesday night, Greek officials said, Varoufakis and Tsipras had refined many drafts and sent the extension request.

It appeared to concede on all key points, saying Greece would honour all its debts and bailout terms. Yet Germany scotched their hopes, insisting the letter was, in the words of a leaked Eurogroup briefing note, a «Trojan horse».

Home truths

Later on Thursday, Merkel and Tsipras spoke on the phone for the best part of an hour. For the Greek side, which pushed in vain for a top-level political summit on how to reshape the austerity policies of the euro zone, the call was a chance to be heard.

For German officials, who were voicing concerns that Tsipras had started to announce measures to reverse spending cuts, it gave Merkel an opportunity to underline how far Athens had lost its partners’ trust and to make clear only a watertight text could pass the German parliament.

With the benefit of Merkel’s briefing, it was Tsipras who led negotiations on Friday, over the telephone to Dijsselbloem in Brussels, officials on both sides said.

As financial markets braced for possible capital controls over a three-day Greek bank holiday weekend, Dijsselbloem and Lagarde shuttled between Schaeuble and Varoufakis in separate rooms bearing draft texts.

With a Greek bank collapse looming, Tsipras took the responsibility of accepting a deal he believed he could sell to his broad coalition of far left and far right.

His spokesman said: «These last three weeks were tough weeks for a new government which, let’s not kid ourselves, we’re not trying to fool anyone, hasn’t got the relevant experience.”

Opinion polls show most Greeks preferred an «honourable compromise» over a further clash with Europe or abandoning the euro. They are prepared to give Tsipras time.

Greek sources said Tsipras intervened in part to shield Varoufakis who, as a newcomer to Syriza, does not yet command the trust of party hardliners. The pair remain close.

Varoufakis was subdued and said little at Friday’s Eurogroup, according to those present.

It was a mark of Greece’s isolation that the last hitch came from Spanish Finance Minister Luis De Guindos insisting there be a new meeting on Tuesday if Athens fails to come up with a satisfactory list of policy measures for the next four months.

Spanish conservatives fear concessions to Tsipras will boost their anti-austerity challengers in an election late this year.

That Tsipras has embarked on damage limitation does not concern German officials reassured to have extracted a tight legal text: «It’s no problem that Tsipras is now … claiming victory,» one said. «All that counts is what is down on paper.”

But it is trust as much as law that holds the 19-state euro zone together. And that may be harder to fix. As Dijsselbloem said late on Friday, quoting a Dutch proverb: «Trust leaves on horseback – and returns on foot.”