Greece Might Have Found Its Deus Ex Machina In €5 Billion Russian Gas Transit Deal

There's rumours coming out of Germany that Greece might have found it's Deus Ex Machina to allow it to avoid looming default in a deal with Russia and Gazprom over transit rights for a natural gas pipeline. It's long been known that such a pipeline to cross Greek territory has been under discussion and that construction looked very likely. But the important point of the current story is that Russia will advance a significant part of future transfer fees upfront. Thus very much easing the cash crunch that Greece is under. Whether it will really happen is still unknown but it looks like a smart move by both sides. Russia gets something it was going to have to pay for anyway, those transit rights, and Greece gets what it wants, money right now.

Here's one version of the story:

Greece could reap up to €5bn from a planned Russian gas pipeline that runs through the country and on to the rest of Europe, easing fears it could run out of money within weeks.

The construction of the "Turkish Stream" pipe could "turn the tide" for the debt-stricken country, Der Spiegel quoted a senior official in Greece's ruling Syriza party as saying.

A deal between Russia and Greece is expected to be signed on Tuesday, the magazine added, with the payment an advance on future profits from transit fees.

Well, it's not quite "profits" on the transfer fees, it's simply an advance upon those transit fees. For this is the general manner in which pipelines work, the people transporting valuable materials through a pipeline pay fees to the country whose territory the pipeline crosses. Not particularly because it's just or right that they do so, rather because it makes countries more likely to allow you to build a pipeline through them.

Russia to loan Greece ‘up to $5bn’ to join Turkish pipeline

That's actually slightly more accurate. This is indeed a loan and as such it should add to the stated borrowing of the Greek state (whether they actually give it that accounting treatment is another matter). And it's that that makes the story so interesting. Assume that the deal is signed, that the payment is made (with whatever level of certainty you want to allocate to that), well, what happens next? That rather depends upon what Greece's creditors think about what that cash is, doesn't it?

We can imagine the Greek and Eurogroup sides taking rather different views here. Greece might well say, given that Syriza is indeed a left wing party, that this is extra cash that can be spent now. So, there's enough to meet the IMF repayments, the ECB, and also cover maturing treasury bills. But there's also enough there to relax the austerity being imposed upon the Greek economy. Perhaps it could pay for better pensions, for rehiring some of those fired civil servants, or substitute for some other part of the current deal that they don't like.

And we can also imagine the Eurogroup saying that no, no, it's not really like that at all. This is indeed borrowing from the future (which it is) and thus needs to be treated as such. Yes, sure, the cash flow can be used to pay off past debts: but none of that money can be used to relax the strictures on the Greek economy. Given that this is borrowing we'll just reduce the amount that Greece can borrow elsewhere at the same time. For example, reduce the limit on the number of treasury bills that Greece can roll over (there is already such a limit). We could imagine that Eurogroup adopting the possible Greek view of it all as well but I tend to think that's rather more unlikely. My opinion is that, assuming Greece does get € 5 billion pouring in from Russia then the limits on Greece's other borrowings will be tightened leaving the actual Greek austerity position entirely untouched: while, obviously, helping enormously with the cash flow situation.

That will set off the most almighty row within Greece of course but that's the way I see it playing out.