Greece's rock-star finance minister Yanis Varoufakis defies ECB's drachma threats

By Ambrose Evans-Pritchard 03 February 2015

'I will tell Mr Schäuble that we may be a Left-wing riff-raff but he can count on our Syriza movement to clear away Greece’s cartels and oligarchies,' says Yanis Varoufakis

Yanis Varoufakis (right), Greece's finance minister, with Prime Minister Alexis Tsipras Photo: AP

Greece’s finance minister has denounced Eurozone threats to cut off funding for Greek banks later this month as political intimidation, warning in fiery language that his country’s democratic revolution will not be crushed into submission.

Yanis Varoufakis, the emerging rock-star of Europe’s anti-austerity uprising, said the European Central Bank is straying into murky waters by openly stating that it may cease to act as lender-of-last resort for the Greek financial system.

“These threats are perfectly illegitimate. They are trying to asphyxiate us with arbitrary deadlines,” he told The Telegraph during a lightning tour of EU capitals to drum up support.

A string of ECB officials have said in recent days that the institution would no longer accept Greek debt as collateral in exchange for loans after February 28, if Greece refuses to cooperate with the EU-IMF troika and walks away from its bail-out deal.

The move would cut off up to €54bn of liquidity currently keeping Greek lenders afloat. Syriza's leaders are fully aware that this would trigger a banking collapse, full-blown default and ejection from the euro within days. Greek officials grumble that the ECB is acting as a political enforcer without treaty authority. Frankfurt has full discretion over how it sets its own collateral rules and can change them at any time regardless of what the rating agencies say.

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The Athens stock market has shrugged off the dispute for now. The ASE index jumped 11pc on Tuesday on hopes that a €345bn "master plan" for Greek debt unveiled by Mr Varoufakis in London will finesse the neuralgic issue of a debt write-down and avert a showdown, even though EMU creditors remain deeply sceptical. Bank stocks surged 17pc, while Greece’s 10-year bond yields plummeted by 137 points to 9.26pc.

Mr Varoufakis is braced for an arid meeting on Thursday with his German counterpart and long-time nemesis Wolfgang Schäuble, a man he once accused – borrowing from Tacitus - of reducing Europe to a desert and calling it peace.

“I will try to be as charming as I can in Berlin. I will tell Mr Schäuble that we may be a Left-wing riff-raff but he can count on our Syriza movement to clear away Greece’s cartels and oligarchies, and push through the deep reforms of the Greek state that governments before us refused to do,” he said.

“But I will also tell him that we are going to end the debt-deflation spiral and do what should have been done five years ago. That is not negotiable. We have a democratic mandate to challenge the whole philosophy of austerity,” he said.

Mr Varoufakis said he had asked Brussels for an increase in the troika's €15bn limit on issuance of short-term bills by the Greek treasury, money desperately needed to plug a critical funding gap over coming months. He denied reports of a €10bn plea. “We need the fiscal space until June to hammer out a plan,” he said.

The decision would require the political assent of all three members of the EU-IMF troika, including the ECB. He will discuss the details with the ECB’s Mario Draghi in Frankfurt on Wednesday.

The flamboyant finance minister, surviving on adrenaline as he darts from one EU power centre to another, is an ardent pro-European but has no illusions about the bare-knuckled nature of the struggle over Greece. “We have been warned that there are certain members of the Euro group who want to shoot us down. But we also have support. It is evenly balanced,” he said.

“The French are very keen for us to find our feet. They are deeply uneasy about what is happening in Europe and they will not be silent observers if we are choked, strangled and snuffed out, for they fear the ground will start to crumble under their own feet,” he said.

Jean-Claude Junker, the European Commission’s chief, held out an olive branch of sorts, admitting that the troika policies imposed on Greece had been too harsh. “We have to correct past errors. What we should not do is simply replace them with the exact opposite. That will drives us into the wall," he said.

Mr Varoufakis was coy about his talks with George Osborne on Monday, except to say that the Chancellor appeared to be on the “same page” on elements of Greece’s new debt plan.

The proposals offer a bond swap to ease the debt burden – 177pc of GDP - without demanding an explicit write-down of Greece’s foreign loans. This allows both sides to save face. The aim is to slash Greece’s primary budget surplus from the troika target of 4.5pc of GDP to around 1.5pc to pay for welfare pledges and boost investment. “This gives us a reasonable buffer. The old target is ludicrous,” Mr Varoufakis said.

Loans from the EU bailout machinery would be replaced by GDP-linked bonds, akin to Keynes’s "Bisque Bonds" in the 1930s. Money owed to the ECB would convert into “perpetual bonds”.

“Everybody knows we are insolvent. What is the point of us borrowing another €7bn to pay back the ECB - which bought the bonds from north European banks to help them, not Greece – when the ECB is in the process of creating €1 trillion of new money? It is clearly absurd.”

“So why don’t we just park the bonds on the books of the ECB. What I am not going to do is borrow yet more money from my colleagues in Italy, France or Slovakia, or wherever,” he said.

Germany is convinced that EMU strategy is starting to bear fruit at long last - a view dismissed as wishful thinking by many economists around the world - and that concessions to Greece will set off a clamour for similar treatment from others, leading to a breakdown of discipline across southern Europe.

Yet Syriza does not view Germany as an implacable opponent. Chancellor Angela Merkel has shown herself to be the ultimate defender of Europe’s post-war order and unity, all too aware of her country’s special duty of care. Other creditor states in the North have less compunction, while conservative leaders in Spain and Portugal reportedly wish to see Syriza crushed in order to fight off anti-austerity populists in their own countries.

Mr Varoufakis was an economics lecturer before being catapulted into the limelight as crusader against the “monumental folly” of Europe's deflation policies. An orthodox Keynesian – unlike neo-Marxists in the Left Platform of Syriza's broad church – he has taught at the universities of Essex, Glasgow, Cambridge, Sydney and Texas.

His latest works are “Europe after the Minotaur” and a “Modest Proposal”, a play on Swift. They are acclaimed blueprints for an EMU-wide reflation drive and a lasting peace to end Europe’s debt wars. They propose a mechanism to recycle the capital surpluses from the creditor states to the deficit states in a stable fashion to prevent the EMU economy as a whole becoming trapped in a self-feeding cycle of contraction. The arguments would be recognisable instantly to Keynes, who grappled with the same issues in the inter-war years when the Gold Standard went awry.

Mr Varoufakis is a fan of "game theory", a branch of economics epitomised by the Nash Equilibrium - the optimal outcome when each side knows what the other wants. But the current stand-off over Greece defies even the intricate formulae of Nobel theorist John Nash.

“Game theory only works if the players are rational. I am not sure that is the case in Europe. Even Nash would be at a loss here,” he said.

Greece's rock-star finance minister Yanis Varoufakis defies ECB's drachma threats - Telegraph