The mood in the room darkened.
‘I hope none of this transpires. Maybe it won’t. But it would be foolish not to prepare for it,’ I said. ‘If they choose this belligerent path, their purpose will be to work out what you are made of, whether you are bluffing and what your true priorities are.’
‘What do you think Merkel wants?’ said Alexis. ‘I cannot believe she thinks it’s in her interests to stir up another crisis.’
‘Berlin will not dare upset the markets by closing Greece’s banks down,’ interjected Pappas. ‘Greece is not Cyprus. They cannot push us around like that without consequences.’
I begged to differ. In my view Merkel and Schäuble had no intention of going to their parliament to support debt relief for Greece, a move tantamount to confessing that the first two bailouts had been given under false pretences. The only way Berlin could avoid such a confession was to arrange a third bailout loan, keeping Greece in debtors’ prison but officially not in default. But as each bailout required the sacrifice of a Greek prime minister (Papandreou for the first, Samaras for the second) and a fresh government to push it through parliament, they would try either to win Alexis over to their side or to create such chaos that his government fell, allowing for its replacement with a compliant technocratic administration, just as they had had in 2012.
Alexis looked grim. ‘But what about Pappas’s point?’ he said. ‘Are they not scared of tumult in the markets?’
‘They are,’ I explained, ‘but just when you might be moving into Maximos, the ECB will be unleashing a torrent of money with which to stabilize the eurozone.’ Such a ‘quantitative easing’ programme involved the mass purchase of government bonds using the digital printing presses of the ECB. This would push down interest rates in key states such as Italy, Spain and France. Two years in the planning, it was Mario Draghi’s strategy to buy time for the euro.
‘It would be idiotic to think of this as a coincidence,’ I said. ‘Merkel may well feel that the moment the markets are flooded by ECB money, an ECB-led enforced Greek bank holiday will go reasonably smoothly for her and Europe’s financiers.’
‘How do we upset their plan then?’ asked Alexis.
‘To extract from them a half-decent agreement,’ I said, ‘you must give the ECB good cause to hesitate before shutting down the banks.’
Key deterrent: the ECB’s remaining Greek debt
The strategy for deterring a bank shutdown that we had discussed in June – based on the Five-Pronged Strategy I had presented at my first meeting with Alexis’s economic team in May 2013, itself based on the initial paper I had presented in June 2012 – hinged on the legal battle between Mario Draghi at the ECB and the Bundesbank under Jens Weidmann. Draghi had promised to buy vast amounts of government bonds from Europe’s shaky economies in order to prop up the eurozone. The Bundesbank had taken him to court over this, claiming it violated the constitution of the ECB. In February 2014 the German courts had referred the matter to the European Court of Justice, which ruled in favour of Draghi, but their judgment included caveats – caveats that in my analysis gave a future Syriza government considerable leverage. My reading of them was that Draghi’s power to continue buying government debt was conditional on protecting the ECB from any write-down of government debt the ECB already owned. This included the so-called SMP bonds: Greek government bonds it had acquired from private investors as part of what it had branded the Securities Market Programme.
The sum that the Greek state still owed the ECB in the form of these outstanding bonds came to $33 billion. From Greece’s perspective it was a lot of money, especially given that repayments of $6.6 billion were coming up in July and August 2015. But from the ECB’s perspective it was financially insignificant when compared to the one trillion euros and more that the ECB was planning to release. Nonetheless, those few billions of Greek debt to the ECB were legally momentous: any haircut of that sum or delay in its repayment would open Draghi and the ECB up to legal challenges from the Bundesbank and the German Constitutional Court, undermining the credibility of its overall debt-purchasing programme and causing a rift with Chancellor Merkel, who would never take on both the Bundesbank and the German Constitutional Court at the same time. Facing their combined might, Draghi was sure to find his freedom drastically curtailed, thus undermining the markets’ faith in his hitherto magical promise to do ‘whatever it takes’ to save the euro – the only thing preventing the currency’s collapse.
‘Mario Draghi is about to unleash a major debt purchasing programme in March 2015, without which the euro is toast,’ I said. ‘The last thing he needs is anything that will impede this.’5 A Syriza government had therefore to signal to Draghi that it wanted a mutually advantageous deal with the EU, the ECB and the IMF and was willing to compromise to get this. But it must also signal, discreetly but firmly, that if Draghi were to shut down Greece’s banks in response to a Syriza victory, it would consider this a casus belli and would immediately legislate to postpone redemption of the Greek government bonds owned by the ECB by, say, two decades. I had no doubt that if a Syriza government signalled early on its intention to retaliate by haircutting the Greek SMP bonds held by the ECB in this way, it would deter the ECB from closing down the banks.
‘Draghi is too wise a central banker to risk this simply in order to allow Berlin to steamroller you,’ I told Alexis. ‘Of course, on the other hand, if you fail to convince him that you are serious about haircutting those SMP bonds, he will have no reason to antagonize Berlin by refusing its request that he crush you with an enforced bank holiday.’
As in 2012, so again in Alexis’s apartment that night, I was at pains to stress one simple thing: in this and in every aspect of the negotiation they faced, Syriza could not afford to bluff. Even if Draghi did shut down the banks, Alexis’s government had to be ready to keep the economy ticking over for several weeks. If he continued to stand his ground even then – signalling to Berlin and to Frankfurt that, while his government’s aim was an honourable agreement, it nonetheless preferred a costly and unwanted Grexit to the nightmare of capitulation to debt bondage – then the real negotiations would begin.
Was this a battle they were prepared to see through to the end?
Pappas seemed offended that I should ask. Alexis, more restrained, said with an air of resignation, ‘We have no alternative.’ Dragasakis said nothing.
It was imperative then that they had a plan for buying time, I told them; a way of getting through several weeks so that they would not have to choose between Grexit and surrender the very moment the ATMs closed. This would also give Merkel and Draghi the chance to step back from a terminal rupture once it became clear that Syriza meant business. To do this, they would need a payments system ready to kick in the moment the banks closed.
A parallel payments system
The scheme I outlined, alluded to in June 2012 and in the Five-Pronged Strategy of May 2013, was based on theoretical work I had done previously on how fiscally stressed eurozone governments could gain some room for manoeuvre through a novel utilization of their tax office websites. The gist of it was simple.
Suppose that the state owes Company A €1 million but is delaying payment owing to the state’s liquidity squeeze. Suppose also that Company A owes €30,000 to Jill, one of its employees, plus another €500,000 to Company B, which supplied it with raw materials. Meanwhile, Jill and Company B also owe, respectively, €10,000 and €200,000 in taxes to the state. Now imagine that the tax office creates a reserve account for each taxpayer (per tax file number, to be precise), including for Companies A and B and Jill. The state can then just ‘deposit’ €1 million into Company A’s reserve account simply by typing it in and provide each taxpayer with a PIN to be used to transfer ‘funds’ from one taxpayer’s reserve account to another. Company A could then transfer €30,000 to Jill’s reserve account and €500,000 to Company B’s reserve account, which Jill and Company B could then use to repay the €10,000 and €200,000 they respectively owe the state in tax arrears. The immediate cancellation of many arrears would have been thus effected.
Such a system would be great to have in Portugal, in Italy, indeed in France even during the best of times, but it would be critical in Greece during the emergency of an ECB-enforced bank holiday, allowing all sorts of transactions to continue, not just those with the state. For example, pensions could be partly paid into a pensioner’s tax office reserve account, and the pensioner could then transfer a part of that sum to, say, her landlord, who would also have tax to pay. Even though these credits could not be withdrawn from the system as cash, the scheme would continue to work for as long as the state continued to accept the credits in lieu of tax. And it could work remarkably well if it were developed further in two ways.
Every Greek citizen already has an identity card. Imagine if this were reissued as a smart card featuring a microchip similar to those in modern debit and credit cards. The ID cards of pensioners, public-sector workers, people on benefits, government suppliers – anyone who has financial dealings with the state – could be linked to their tax office reserve accounts and used to pay for goods and services at supermarkets, petrol stations and the like. In other words, even if the banks were to close down, even if the state was rendered illiquid, the government could still meet its obligations simply by assigning tax credits to people’s ID cards – as long as the total value credited did not run the government into a fiscal deficit, of course.
Second, the same system could be used to allow the government to borrow from Greek citizens, thus bypassing the commercial banks, the hostile and suspicious money markets and, of course, the troika. As well as receiving tax credits from the state, citizens could be given the option to buy credits from the tax office online, using web banking linked to their normal bank accounts. Why would they want to do this? Because the government would offer them a discount of, say, 10 per cent, if they later used those credits to pay their taxes, say, a year down the line. The state would in effect be borrowing from its citizens at an interest rate (10 per cent) that no European can get from any bank these days. As long as the total level of tax credits sold by the government was capped and fully transparent, the result would be a fiscally responsible increase in government liquidity, greater freedom from the troika and thus a shorter path to the ultimate goal of a viable new agreement with the EU and the IMF.
Seemingly impressed, Dragasakis asked me to produce a written blueprint for this scheme, while Alexis and Pappas appeared soothed by the thought of the precious time it would buy them after a rupture with the creditors. Within forty-eight hours of my return to Austin I had sent a ten-page technical blueprint to Pappas to pass on to Alexis and Dragasakis.
Let’s briefly fast-forward four months to March 2015 and to a cabinet meeting of the Syriza government with Alexis, as prime minister, in the chair. After an assessment of the confrontation with the troika that had begun with a vengeance on day one, just as anticipated, I outlined a bill my ministry had tabled in parliament to combat the humanitarian crisis: debit cards would be issued to three hundred thousand families living below the poverty line, with a credit of a few hundred euros per month to cover their basic needs.
‘But these cards are just the beginning,’ I said. ‘Soon they could replace ID cards and provide the basis of a payments system that functions in parallel with the banks.’
After I explained how the system would work, I outlined its many advantages: it would give the government more fiscal space, support the poor without subjecting them to the stigma of using coupons and, above all, signal to the troika that Greece had a payments system that would allow our economy to function even if they closed down our banks. Lastly, I pointed out that if the troika decided to push Greece out of the eurozone, as the German finance minister had been wanting to do for years,6 this same payment system could be redenominated to a new currency at the press of a button.
When the cabinet meeting was adjourned, most of the ministers present approached me to express their enthusiasm, some patting me on the back, others embracing me, one telling me that she was moved and inspired.
Five months later, after my resignation, the press lambasted me for having entered into a tough negotiation without a back-up plan. For days I was mocked in the media not just by opposition politicians but also by many Syriza MPs for walking into the lion’s den without a strategy for what to do if the banks were shut down. I waited to see if Alexis or anyone else in the cabinet came forward to put the record straight. None did. So, during a teleconference conducted by David Marsh of the Official Monetary and Financial Institutions Forum in which I was replying to questions on what had gone wrong with the Greek government’s negotiations with the EU and the IMF I made known my plans for a parallel payments system.
The discussion was supposedly being held under the Chatham House Rule, allowing participants to quote what is said but not to attribute it to the speaker, but this convention was ignored. Recordings of my entire presentation were soon made public. Immediately those same journalists and politicians who had been ridiculing me for not having a Plan B suddenly accused me of the direct opposite: VAROUFAKIS’S SECRET GREXIT PLAN was a typical headline, suggesting that I had gone behind Alexis’s back to engineer a devilish plot for getting Greece out of the euro. Calls to indict me on criminal charges began to mount. Indeed, while these lines are being written a charge of high treason is hanging over me in Greece’s parliament for undermining Prime Minister Tsipras by means of a ‘secret plot’.
It is a source of personal pride and joy to me that the troika’s cheerleaders within Greece use every opportunity they can to undermine me. I consider their attacks a badge of honour, conferred for having dared to say no to their demands in the Eurogroup. But to have former cabinet colleagues, those very same people who filed past me to praise my proposed payments system, either pretend they have never heard of it or join in with the denunciations fills me only with sadness.
The offer
The offer caught me completely unawares. Around midnight in Alexis’s flat the discussion moved from deterrence and parallel payments systems to practical politics. Alexis briefed me on the high probability of an early election. The government’s term had more than two years left to run, but it was doubtful it could survive beyond March 2015, when the five-year term of the president of the republic expired. Unless Prime Minister Samaras could muster a reinforced parliamentary majority around his chosen presidential candidate, parliament would be automatically dissolved and elections called.7 Alexis then delivered his offer, unassumingly and under Dragasakis’s watchful eye.
‘If we win, and there is no doubt we shall, we want you to become finance minister.’
Throughout my journey from Austin to Athens I had been reciting the precise wording in which I would turn his offer down – except that I had been anticipating a completely different offer from the one he had made, that of chief negotiator under Finance Minister Dragasakis. But now Alexis was proposing to unify the two roles and make me responsible for both.
To buy time, and in genuine puzzlement, I turned to Dragasakis. ‘But I thought that you would assume the finance ministry.’
Alexis stepped in to explain: ‘Dragasakis will be deputy prime minister overseeing the three economic ministries,’ meaning the Ministry of Finance, the Ministry of the Economy and a new Ministry of Productive Reconstruction.8
This changed everything. The proposed cabinet structure was sensible. The only reason for turning down Alexis’s offer now would have been doubt regarding his and Dragasakis’s true intentions, calibre or character. It would have been awkward, to say the least, to bring up such fundamental doubts with them directly. I raised another issue of principle instead.
