Greece remains in the spotlight and neither side seems willing to make a substantial change. This is the way it’s been for five years.

Making matters worse for Greece, President Obama Says Time for Tsipras to Make ‘Tough Choices’.

Barack Obama, the US president, put Athens on notice that it needed to urgently make difficult economic reforms in the clearest sign yet Greece was becoming isolated on the international stage for its combative stance towards its bailout creditors.

Breaking from past urgings for both sides to make concessions, Mr Obama put the onus on Alexis Tsipras, the Greek prime minister, saying it was time for “tough decisions”.

“What it’s going to require is Greece being serious about making some important reforms, not only to satisfy creditors, but also to create a platform where the Greek economy can start growing again,” Mr Obama said at a post-summit news conference. “The Greeks are going to have to follow through and make some tough political choices that are going to be good in the long term.”

By publicly emphasising Greece’s obligations at such a critical time in the negotiations, Mr Obama has closed off one of the last potential escape valves for Athens.

Proposal Dismissed by Creditors as “Vague Rehash”

Bloomberg reports New Greek Budget Plan Falls Short of Last Week’s Pledge.

Greece pulled back on budget concessions to its creditors in new proposals Tuesday, as German Finance Minister Wolfgang Schaeuble said it would be “daft” to accept blame for Prime Minister Alexis Tsipras’s predicament.

The latest plan falls short of the budget targets that Tsipras agreed on in a June 3 meeting with European Commission President Jean-Claude Juncker, a European Union official said. Greece didn’t dispute those objectives in any of its subsequent meetings with creditor institutions last week, according to the official.

As a result, Greece is sliding backward in its negotiations as it enters the last weeks of its bailout deal.

“It’s not possible that the borrower decides under what conditions the lender kindly gives his money,” Volker Kauder, caucus leader of Chancellor Angela Merkel’s bloc in parliament, said Tuesday in Berlin. “We want Greece to stay in the euro, but whether this is achievable depends entirely on Greece.”

Under the latest Greek plan, Tsipras wants access to bailout funds left in the European Financial Stability Facility and for the country’s banks to be allowed to buy more of the state’s short-term debt, an international official said. Greece also requested funds from the European Stability Mechanism to repay about 6.7 billion euros of bonds held by the European Central Bank that come due in July and August.

The official described the revised Greek plan as a vague rehash of earlier proposals and said it is not credible.

Greek “Paperology” Continues

The Financial Times reports ‘Paperology’ Continues, but Mood Darkens in Greece Talks.

Greece has submitted yet another last-minute economic reform proposal to its bailout creditors — and its creditors have once again dismissed it as lacking. The process has become numbingly familiar in recent weeks — so much so that the European Commission has even given it a name: “paperology”.

Athens, they believe, is intentionally prolonging the negotiations to the last minute in a belief that its creditors will eventually “blink” and agree to grant wholesale debt relief and new bailout cash with few strings attached.

“They do not want a deal with us; they just want debt relief,” a senior official with one of Athens’ bailout monitors said after reviewing Greece’s latest offer.

“I don’t think they will move. I think they’re waiting for us to blink, and we won’t,” the official added. “They don’t understand we’re not back in 2012 where the Europeans were willing to just throw money at the problem.”

Two Dismal Plans

Wolfgang Münchau discusses Two Dismal Economic Plans for Greece.

There are now two proposals on the table — one from the creditors and one from Greece. What they have in common is that neither of them will fix the Greek economy. They do not even pretend. Both deserve to be rejected flat-out.

In particular, they [creditors] refuse to recognise officially that their loans to Greece will never be repaid. They know they misled their electorates about Greece, and do not want to be exposed, at least not while they are in office.

The main goal for Alexis Tsipras, Greek prime minister, meanwhile, is to stay in power. An agreement of the extend-and-pretend variety, which is the likely outcome of these negotiations if they end in success, may suit him. And thus the probability of a lousy deal that suits the negotiators but that will not help the Greek economy is high.

Step back a little and the solution is not hard to see: less austerity, more public sector reforms, and some clever debt restructuring. That was the overwhelming conclusion of a recent conference by some of the world’s leading experts on this issue, as reported by Richard Portes and co-authors from the London Business School in a recent article.

We are not talking about reforms of the ideological variety, on hiring and firing for example, or on ending collective bargaining, but socially useful reforms such as credible tax collection, a modern public administration or a working legal system.

Without a modernisation of Greek public-sector infrastructure, there is no way that Greece and large parts of northern Europe can coexist in a monetary union. It would be a recipe for a never-ending, structural slump.

How about the argument that Greece should accept a bad deal now, as it would buy time for a more comprehensive negotiation during the summer? The trouble with that argument is a false premise. Once Greece accepts the current deal, it will have accepted the basis of the next agreement as well because the fiscal calculations will not change. If you accept austerity now, you have accepted it.

The best negotiating tactic for Mr Tsipras would be to reject the creditors’ offer flat-out, and come back with an intelligent plan, one that has a chance to work. It would have to include more reforms than he is offering right now. He would need to go beyond his famous red lines — on pensions or on value added tax, for example.

Nearly Correct

Münchau goes on to say “The worst possible outcome would be another extend-and-pretend type deal, leaving an unreformed and cash-deprived Greece in a perma-depression.”

On that point I strongly agree. But higher taxes will just make matters worse. The main thing Greece needs is pension and work rule reform.

The best possible outcome would be for Greece to tell the Troika to go to hell, default, initiate reforms and grow out of the problem.

Unfortunately, Tsipras does not want those reforms, while the creditors want higher taxes. Hiking taxes in the middle of an economic depression is madness.

The only reason it has not come to Grexit already is insistence from Chancellor Merkel that Greece stay in the eurozone.

Haircuts Coming

One way or another, haircuts are coming. Either the creditors agree to them or Greece defaults. The game now for both sides has nothing to do with what’s best for Greece. Instead, both sides simply want to point the finger at the other when this mess flies apart.

Had the ECB been smart, it would have ended Emergency Liquidity Assistance (ELA) long ago. But that would have given Greece the upper hand in finger-pointing. Instead, time buying “paperology” allows Greek citizens to quietly pull money from Greek banks.

German taxpayers will pay one way or another. The smart move would have been to discuss another haircut while demanding genuine reforms instead of tax hikes. But neither side could sell such a plan to its constituency.

Dishonesty by both sides is rampant.

Mike “Mish” Shedlock