Plan B or B-Movie?

Greek PM Alexis Tsipras and former Finance Minister Yanis Varoufakis, in happier times. Photo by Kostas Tsironis/Bloomberg via Getty Images.

So Greece's creditors are back in Athens to hash out bailout 3.0, and if the world were a boring place, the biggest headline would be that the EU/IMF/ECB "troika" added a fourth member-the European Stability Mechanism (ESM)-and therefore got a new name, the "quadriga." But the world is not a boring place, and Monday's Greek headlines read like a bad political thriller, full of intrigue and b-movie plot twists as details of Syriza rebels' shenanigans emerged. Former Energy Minister Panayotis Lafazanis apparently wanted to raid the national mint, seize the central bank, arrest central bank Governor Yannis Stournaras and pivot toward Russia. Former Finance Minister Yanis Varoufakis hacked the general secretary of public revenues (GDDE, basically Greece's IRS) in order to create a "Plan B" financial system in case of "Grexit." And had revealed his plot to 84 financial industry bigwigs during a recorded conference call. Which inevitably leaked. Now opposition leaders are calling for his head, GDDE has launched an investigation, criminal charges might loom, and Syriza is hanging by a thread. With chaos mounting, early elections looking increasingly likely and quadriga officials overall pessimistic, this seems like a good time for a public service announcement: Greece's third bailout is far from a done deal, and Grexit brinksmanship could easily return. However, Greece is just as much of a sideshow for global stocks today as it was two weeks ago, two months ago and yes, two years ago. We suggest steeling yourself against the noise in advance.

"Crazy" doesn't do the insanity of either former minister's scheme justice. Both make a mockery of the law and would be more at home in the late Hugo Chavez's Venezuela or Cristina Fernandez's Argentina, not the EU. Lafazanis' plan is largely hearsay, but Varoufakis' comes straight from the horse's mouth. Listen to it or read the transcript for the full effect, but here is the Reader's Digest version.^[i] Before January's election, now-PM Alexis Tsipras asked Varoufakis to explore an in-case-of-Grexit Plan B. So Varoufakis assembled a team of five ("a small team, as it had to be, because that had to be kept completely under wraps, for obvious reasons") to dream up a "parallel payment system" that would allow Greeks to keep transacting even if their banking system shut down. Their solution was to tap into the GDDE system and "create, surreptitiously, reserve accounts attached to every tax file number without telling anyone," which individuals and businesses could use to transfer money, pay bills and the like. Only trouble is, the troika is quite involved with GDDE, so they couldn't get permission to do this without alerting creditors.^[ii] So, Varoufakis authorized one of his team members, a childhood friend who was also an IT expert at Columbia University, to hack GDDE to "copy the codes of the tax systems' website onto a large computer in his office, so he can work out how to design and implement this parallel payment system." By the time Greek banks closed in late June they'd worked it out and "were ready to get the green light from the Prime Minister ... to plug this laptop in and to energize the system."^[iii]

Tsipras did not give the green light. He hasn't released a statement on Varoufakis' revelations, but his allies say the former fin-min basically went rogue. Opposition parties want Parliament to consider lifting his immunity to criminal charges, and Supreme Court prosecutors are weighing their next move. Varoufakis told The Telegraphhe expects to be charged with treason, but that might also just be for dramatic effect. Either way, though, this much is clear: Syriza-or The Coalition of the Radical Left, if you prefer its full name-is a mess.^[iv]

Lafazanis and Varoufakis, from what we've read, don't represent the Syriza mainstream. Tsipras sacked Lafavanis, leader of Syriza's "Left Platform" faction, after he voted against the bailout preconditions two weeks ago. Varoufakis either resigned or was asked to resign, depending on which of his tales you choose to believe, when Tsipras decided to compromise with creditors and rejected Varoufakis' crazy Plan B. Their antics illustrate just how fragile Tsipras' government is. Tsipras himself remains wildly popular if recent polling is accurate-68% of Greek voters say he's the best person to lead their country, and he has no clear political rival. But Syriza is collapsing. The 30-ish member Left Platform has all but officially splintered off. Tsipras effectively heads up a minority government, reliant on opposition votes to pass major bills. That could be enough to get him through bailout negotiations, but passing and implementing the legislation required to earn aid throughout the three-year program will take time and significant political capital.

So Tsipras has two big things on his plate: Negotiating the bailout and quelling the infighting.^[v] All involved want the bailout signed by August 20, when another big ECB loan repayment is due. Possible, but considering they spent the last several days haggling over which hotel the quadriga should stay at and which ministries they can access, we wouldn't hold our breath. Germany is making noises about more preconditions, Greek authorities say they're done with preconditions, the IMF and ECB (and obviously Greece) are lobbying for debt relief, Germany basically says nein to debt relief, and German Finance Minister Wolfgang Schäuble continues briefing that everyone might be better off if Greece walks. Needless to say, officials are already noodling the possibility of a second bridge loan to cover that August 20 payment and give Greece and creditors more time to hash this out.

This raises the question of how long Tsipras can keep a lid on Syriza. At a party secretariat meeting Monday, he told rebels to put up or shut up-either offer a credible alternative to his compromise, or leave the party (and Parliament) and make way for the moderates.^[vi] But Lafazanis and his posse have dug in, arguing Tsipras betrayed Syriza's core values and intimating he isn't fit to lead the party. This raises the likelihood of purging them at a party congress and holding new elections later this year, and insiders report a contest could come in November, with Tsipras leading a revamped Syriza-a coalition of the not-so-radical left, we guess.

Winning, theoretically, would give him a firm mandate to see through bailout reforms, but before you get too excited, consider voters gave a pro-euro coalition a good-sized majority in 2012. They passed only some of the laws required by the bailout and implemented even fewer. Tsipras, for all his newfound love of compromise, has let everyone know he hates the deal he signed and thinks it's bad for Greece. Not to be all Debbie Downer, but if pro-euro, austerity-friendly governments couldn't fulfill the more relaxed terms of the prior bailouts, we have a hard time seeing the anti-austerity Tsipras fulfilling even harsher terms. Even if he is steadfast, austerity will be a tough sell with voters and Parliament once the financial bloodbath from Syriza's first five months in power shows up in economic data. Plunging money supply and hemorrhaging banks are big, big negatives. (Exhibits 1-3)

In short: There are many, many opportunities for Greece's journey to go awry. And if it does, Grexit dread will almost surely return. But whether Greece kicks the can indefinitely, crashes out and Grexit or sees the deal through and emerge years from now a reformed prosperous state, the global market impact is likely minimal. Markets have moved on from contagion risk.

Exhibit 1: Greek M3 Money Supply

Source: FactSet, as of 7/27/2015. Greek contribution to eurozone M3 money supply, June 2009 - May 2015.

Exhibit 2: Greek Bank Lending

Source: ECB, as of 7/27/2015. Loans to Greek households and non-financial corporations, June 2010 - June 2015.

Exhibit 3: Greek Bank Run

Source: ECB, as of 7/27/2015. Deposits by Greek households and non-financial corporations, June 2009 - June 2015.