The Troika’s better BATNA

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Ask any business school graduate of the past 30 years what they remember about their course on negotiations, and the knee-jerk reaction will likely be to blurt out the acronym “BATNA”. The idea behind BATNA, or Best Alternative to a Negotiated Agreement, is a simple but powerful one.1 A party to a negotiation can improve his or her bargaining position by improving their alternative to an agreement. As a result, walking away from stalled negotiations, rather than giving in to the demands of the other party, may be the right decision. And if those across the table sense you have an attractive BATNA, they may be more willing to make concessions.

In applying the concept of BATNA to upcoming negotiations between the Troika and Greece’s new Syriza-led government, one is struck by the fact that there really are no strong alternatives for either side. For the Troika, a Greek default would underscore the folly of strongly pro-cyclical austerity. More importantly, it would inflict significant losses on the Eurozone official sector (and ultimately tax payers), undermining support for future policy initiatives aimed at strengthening the Economic and Monetary Union.

While these cost considerations provide incentives for the Troika to seek a compromise with Greece, European policy makers face clear constraints. Acceding to many of Prime Minister Tsipras’ demands would risk strengthening the hand of far-left or -right parties elsewhere in the Eurozone. This possibility could induce current leaders elsewhere in the periphery to dial back their own austerity and reform measures. Spain is a case in point, where the far-left party Podemos is leading in polls for the general election and would likely benefit if Syriza was viewed as successfully challenging the pro-austerity measures of the Troika. So while the Troika has clear incentives to reach an agreement with Greece’s new government, it is limited in how far it can deviate from its past positions in any negotiations. At this point, letting Greece default and possibly exit the Eurozone likely seem preferable to an arrangement that would reward Greece for failing to live up to past commitments and for rolling back prior structural reforms. And Eurozone officials may feel somewhat confident that past measures to strengthen the currency bloc—including the bank asset quality review, progress towards a banking union, and the European Central Bank’s (ECB) Outright Monetary Transactions program—may limit the contagion from a Greek exit. The relative stability of other peripheral spreads may point to reduced contagion risks, though there are likely to be costly unforeseen consequences of a Greek exit, particularly as global risk sentiment would deteriorate meaningfully in the short run.

On the other side of the table, the choices appear even starker. The failure to reach agreement on a new program would force the new Greek government to implement capital controls to stabilize the banking sector and to issue its own paper currency (essentially IOUs of little value) to pay its domestic obligations, leading to rampant inflation. In such an environment, Tsipras would not remain in power for long, as even his constituents support remaining in the Eurozone. These considerations underscore the weakness of Tsipras’ bargaining position. In short, Tsipras does not appear to have anything resembling a BATNA; the alternatives to an agreement with the Troika are all quite poor, and extraordinarily costly for the Greek populace.

These costs for Greece of a Eurozone exit leave the Troika with greater leverage in negotiations. This leverage was on display this past week, as the ECB announced that it would end the waiver that allowed Greek government bonds and those guaranteed by the government to be used as collateral in the ECB’s liquidity operations. This decision will shift over half of Greek bank borrowing from the ECB to the Bank of Greece, and it shows the unwillingness of the Eurosystem to have direct exposure to Greek banks given increasingly poor prospects for concluding the current bailout program. Still, Eurosystem exposure to Greece will not decline, it simply shifts from financial institutions to the Bank of Greece. As such, the ECB may take additional steps to safeguard its balance sheet; under its normal operating procedures, the Governing Council can restrict emergency lending to a national central bank by a two-thirds majority. We expect that the ECB will not act in a manner that will precipitate a full run on the Greek banking system; nonetheless, its recent actions demonstrate that the ECB plans on using its critical role as lender of last resort to apply pressure on Greece to reach a settlement.

Ahead of key negotiations on Greece this week among Eurozone finance ministers, Prime Minister Tsipras continues to strike a defiant tone. The risks of a Greek exit from the Eurozone are now higher than at any time since the beginning of Europe’s fiscal and banking crisis. Still, there remains scope for an agreement, particularly around reducing Greece’s primary budget surplus targets for the years ahead, possibly in exchange for a renewed commitment to structural reforms (though Tsipras is already showing signs of backing away from prior reforms). The key question is whether Eurozone taxpayers are willing to continue supporting Greece financially in the interest of keeping the country within the currency bloc. And Eurozone leaders may not be willing to bank on this support indefinitely.

1 Fisher, Roger and William Ury, 1981. “Getting to Yes: Negotiating Agreement Without Giving In.” Houghton Mifflin Company.

Image source: Ververidis Vasilis / Shutterstock.com

Steven Friedman

Senior Investment Strategist

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