At 1:00 AM in Athens on Saturday morning, Greek prime minister Alex Tsipras announced that Greece would hold a referendum on July 5 on whether to accept the terms provided by the creditors in order for Greece to obtain €7.2 billion in “bailout” funds as the final part of a loan package provided to Greece in 2012.
The bailout in fact expires on June 30. It would require the approval of each and every one of the 18 other countries in the Eurozone to extend the bailout beyond June 30. In some countries, most importantly Germany, extending the bailout requires parliamentary approval. The New York Times reported that German chancellor Angela Merkel told Tsipras that the latest offer was “extaordinarily generous.” It has also been widely reported that her stance towards Greece is more generous than that of the German Finance Minister, Wolfgang Schauble, and Schauble’s views on this issue carry more weight in the Bundestag that Merkel’s do.
Now of course, since Schauble taunted Tsirpas in early May that Greece should consider calling a “helpful” referendum, on can argue he can hardly reverse himself now. But his suggestion came in early May, which is an eternity ago, and when a referendum did not conflict with the bailout end. Thus to have this referendum at all requires a approval of Eurozone countries who for the most part are already unhappy with serial Greek brinksmanship, and may well see this as a stunt too far.*
Germany had already demanded that Greece pass legislation consistent with the bailout terms by the end of this weekend as a condition for approval by the Bundestag. It is thus hard to see, absent Schauble having a sudden conversion experience by virtue of a visit by The Ghost of Christmas Future, that a bailout extension would be approved. Other bailout extension offers made by the more Greece-sympathetic European Commission have also been conditioned on Greece agreeing to structural reforms, aka pension cuts and increases in tax collections (curiously, Greece may actually have won a concession of sorts from the creditors in that labor market “reforms” no longer seem to be a major bone of contention). In keeping, the Wall Street Journal reports that, “Some European Union officials in Brussels suggested it would be difficult to persuade other eurozone governments to extend Europe’s bailout program beyond June 30, the current expiration date.” And a morning tweet from the Financial Times’ Peter Spiegel echoes the skepticism:
— Peter Spiegel (@SpiegelPeter) June 27, 2015
Confirming our suspicions, the initial reactions from German MPs do not seem too positive:
— Yannis Koutsomitis (@YanniKouts) June 27, 2015
The Bundestag’s high odds of rejecting a bailout extension alone makes the referendum seem more a desperate ploy than a real exercise of democracy. And let us not forget that some other Eurozone countries, such as Finland, Latvia, and Spain, are if anything more bloody minded on the subject of Greece than Germany. And as Yannis Koutsomitis also tweeted, the creditors could pull the referendum rug out from under Greece by withdrawing their bailout offer this weekend, although if I were them, I’d let the German parliament and like-minded governments do my dirty work.
Remember that Syriza promised to get relief from austerity when as we have discussed at length, it retreated from the promise early on when Yanis Varoufakis said that Greece would always run primary surpluses. It is now embarking on a path that makes an IMF arrearage certain, which likely means the IMF portion of the bailout funds, €3.6 billion, goes poof.
Thus a cold-blooded weighing of the odds means the “referendum” looks like democracy theater. It gives Tsipras and Syriza cover as they have effectively decided to go into arrearage with the IMF (IMF-speak for default, since the IMF is used to dealing with third-world countries) and are relying on the kindness of governments that are already none too pleased with them to not have the bailout expire. So take your pick: is Tsipras deluded, or is he cynically having his cake (leading Greece to a rejection of the bailout due to well-known creditor constraints) while trying to eat it too (packing the outcome as of now as a voter choice)? One measured assessment:
While the #Greece government choice of a referendum is legitimate and could be anticipated, it's timing so late in day is irresponsible -JM
— Joseph Muscat (@JosephMuscat_JM) June 27, 2015
Key events between now and July 5:
¶ Greece goes into arrears on its €1.5 billion payment to the IMF due June 30. Once a country has gone into arrears, the IMF cannot lend new funds. The Telegraph had reported previously that Greece would lose access to certain types of trade finance in the event of an IMF “default.” As Open Europe pointed out:
The short term impact of not paying the IMF may not immediately be dire in economic and financial terms, though of course it would involve serious reputational damage and further widen the already mammoth gap between Greece and its creditors. It may take a month before cross default clauses could be triggered and even then it rests with decisions of highly political institutions such as the EFSF. Such decisions would likely be managed to achieve the least controversial ends, but equally could quickly spiral out of control.
¶ Month-end pension and government salary payment are due. Even when it withholds funds from the IMF, the government will be under great strain to these payments in full in euros. Analysts and even some Greek government officials have speculated that Greece will come up short, and that seems even more likely given the poor results for May tax collection. From Greek Reporter:
Meanwhile, despite the attempts to regulate Greece’s debt a significant revenue collapse was recorded in May, which preludes to the wild taxation that may be imposed during and after this summer.
The public revenue receipts shortage reached 1 billion euros, of which about 650 million come from unpaid taxes. A fact that partially contributed to this shortage was that the tax declarations for Greek citizens have not yet been submitted.
That would mean some or all of these payments would be made in scrip. In California, IOUs called “registered warrants” issued during its budget crisis that paid 3.75% in interest were not accepted by banks as cash and traded at discounts to face value. So the issuance of scrip in lieu of cash will, in economic terms, amount to a partial default on its wage and pension obligations
This is what is likely to happen between now and July 5:
¶ The creditors impose capital controls on Greece, if Greece does not do so itself. This move was already seen as a likely outcome if Greece rejected the bailout terms over the weekend. Greek citizens started draining ATMs immediately after the announcement of the referendum, which means they will probably be emptied by the end of the weekend.
— Giannis Papageorgiou (@Papageorgiou_J) June 26, 2015
I drove by 15 ATMs and they all had line ups of 10-15 people. pic.twitter.com/v2jUfD2B11
— Sakis Michalarakos (@SakisMicha) June 26, 2015
Ekathimerini also provided anecdotes from Saturday morning indicating ATM visits were a priority among people just learning of the referendum.
Eurogroup ministers and European leaders had already been discussing imposing capital controls on Greece in the event it refused to accept the bailout terms, which would represent an unheard-of measure (governments are supposed to have the good sense to do this on their own). Since capital controls can be imposed in varying degrees of stringency (including having the ECB through the Bank of Greece require Greek banks to limit cash withdrawals), we expect that we’ll discuss this topic at greater length after the Saturday summit meetings give a clearer reading on how stringent an approach the ECB and other nations intend to take.
¶ Greek banks run out of liquidity. Given the intensification of the bank run, even with restrictions placed on cash transfers and redemptions, Greek banks could run out of physical cash.** That also raises the specter of if and when Greece is forced to impose a bank holiday. Jens Weidmann of the Bundesbank sent what many reads as a warning that if Greece turned down the bailout, the ECB would not be able to continue supporting Greek banks: “If a country were to decide not to fulfill the commitments attached to the aid, the basis for aid would disappear.” As we’ve stated, the referendum ploy is tantamount to a rejection of the bailout. The question remains open as to what the ECB board would regard as the proximate cause for refusing an increase to the ELA, which would amount to putting all the Greek banks into bankruptcy and forcing the imposition of a bank holiday. Observers overwhelmingly believe, as we’ve argued, that the ECB will not act unless it has political cover, despite the clear unhappiness of Weidmann and other national central bank presidents. However, as we have stressed, the ECB will find it very difficult to resist calls to be more stringent with Greece in the event of a default on a €3.5 billion bond payment due July 20. It is hard to see how the Greek banking system can tolerate any more tightening of the ECB choke chain.
Let us consider the standards by which Tsipras’ and Syriza’s conduct should be judged. Syriza knew that Merkel rejected a request by the the Samaras government to have more time to implement politically toxic (and economically damaging) pension and labor market “reforms”. Merkel saw them as unfinished business of the so-called second bailout of 2012. Syriza came into power as a result of this outtrade, promising to negotiate better treatment after the old government had failed while staying in the Eurozone.
The creditors are known thugs. They have engaged in harsh austerity, putting it in one of the very worst downturn in an economy not in a state of war , used Greece to launder bailouts to French and German banks, not given Greece credit for having implemented numerous “reforms” and broke the last government. Paul Mason is correctly very critical of how the creditors behaved last week. Even I was surprised that they’d press their advantage so far when Tsipras has already crossed a red line while desperately trying to pretend he hadn’t by claiming he wasn’t cutting pensions when actually doing so by requiring increased contributions from retirees.
But again, this goes back to the underlying and still apparently unresolvable gap between the creditor and Greek positions: many of the governments, all of which must approve a bailout, need to have Greece make what they see as meaningful pension cuts. Greece, as Samaras told Merkel in 2014, can’t go as quickly down that path as the creditors demand. And the IMF rejected the Greek finesse of tax increases because Greece has been told for years to fix its collection apparatus and has failed to do so. However, the brutal response should have been no surprise. Anyone who followed how Cyrpus was treated in its banking crisis would know how ruthless Eurozone institutions can be (in that case, the heavy was the ECB)
Among Sun Tsu’s rules of war are “Know your enemy” and “Know yourself”. Syriza appears to have not bothered understanding what they were up against They have seemed to be in denial for the last two months that the creditors were not afraid of a Greek default. Their assumption appears to have been that the national governments would find it too politically toxic to recognize losses on the debt they had extended to Greece through the EFSF and the Greek Bailout Fund. But maturities on these facilities have been extended and payments deferred. And the national governments do not have to mark to market. They will recognize losses only if and when Greece fails to make payments, which is years down the road. And even then, the pain is spread out over decades. That means Greece’s supposed nuclear weapon turns out to be a pop gun.
Thus the question is, will the course of action that Syriza has chosen make the lives of ordinary Greeks better? Are partial defaults on pensions and salaries good for the extended Greek families that Syriza professes to care about? Are capital controls and the likely failure of the Greek banking system, which includes depositors taking near-total losses on any funds they weren’t able to extract? Remember, the parties that are most likely to be stuck in that position are medium-sized businesses, meaning the impact will be seen in even more business failures and loss of jobs (remember, capital controls and bank holiday alone will go that, as the recent example of Cyrus attests).
And a big piece that I have yet to see commentators acknowledge: Greek defiance of its creditors will make it more, not less dependent on them in the next year. How badly things turn out for Greece will depend in significant degree on how much they do to ameliorate the impact of the implosion of the banking system, whether they take extreme measures to keep Greece in the Eurozone, and if Greece tumbles out, how much they provide in humanitarian aid and targeted trade financing (most important, for petroleum imports).
Let us look at the alternate scenario and assume that a large percentage of the Bundestag gets brain transplants in the next day or for other reasons decided to be uncharacteristically kind to the Greek ruling coalition. Greece miraculously gets its bailout extension and so the July 5 vote is not moot. Doesn’t that redeem Tsipras as a leader?
In a word, no. What the did Greek government know as of this weekend that it did not know earlier to justify delaying a referendum so long that it it will probably be moot? As Costas Lapavitsas of Syriza’s central committee pointed out in early March, it was evident that the Troika and Eurogroup were not willing to negotiate a new deal, in both senses of the word, with Greece. Tsipras’ strategy had failed and it was time to change course.
Given Syriza’s now clearly contradictory campaign promises, the party could have done extensive, rigorous polling or held a referendum to determine what to do. Tsipras was clearly aware of that as an option; he kept bringing it up in talks with creditors, apparently thinking it was a threat. But Tsipras already had a fresh election and strong popular approval and yet the creditors were not moved. It did not appear to occur to him that they had an easy defense: that Greece may be a democracy, but so to are the 18 other nations that have to agree to a bailout. As misguided as the beliefs of their electorates might be, they have as much of a right to a say as Greece. But Syriza remained fixated on its domestic needs and never even made a decent argument for why there were some legitimate reasons its pension spending was so high, giving it the appearance of having more generous pensions than those of the countries being asked to fund them. The Wall Street Journal made a better case, for instance, than I ever saw from Greek officials.
If the ruling coalition had any doubt that the creditors would not relent in this game of chicken, they should have been settled as of mid-May. In early May, as we mentioned, Schauble taunted the Greek government, suggesting they have a referendum, a clear statement that Germany was indifferent to a Greek default or exit. In mid-May, Tsipras told Merkel and Hollande that Greece would not be able to make an IMF payment due May 11. He claimed later not to know that the government could do what it did, borrow from an IMF reserve as an emergency source of funds. From Merkel’s and Hollande’s vantage, the default threat was no doubt real and they did not blink.
Similarly, Tsipras should have held a referendum long before he stripped the Greek government of funds to keep paying the creditors, since a default is better managed with some cash on hand.
So the only conceivable excuse for waiting this long is for Tsipras to attempt to save himself. If he were to reject the bailout, the decision is unquestionably his and that of his allies. That it precisely the sort of decision that government leaders are expected to make. Or he could just as well accept the bailout, recognizing that as bad as things are, that the country would be plunged into an even deeper economic sinkhole, putting the survival of even more citizens at risk. It would take forming a new coalition with To Potami and New Democracy, and that would mean that his and Syriza’s position would become far more tenuous and he would be fiercely denounced by many if mot most Syriza MPs.
Thus the referendum ruse looks to be about trying to spare Tsipras and Syriza the worst consequences of his having underestimated the creditors and not preparing for worst-case scenarios, which is another responsibility of leadership that he and his party have neglected.
Greece and Germany are operating from deep cultural impulses. One of Greece’s greatest achievements is creating different dramatic types, among them, the tragedy. No matter how the bailout power struggle winds up, Greece is unlikely to obtain any relief. But the country has yet to experience its moment of tragic recognition. By contrast, one of Germany’s cultural touchstones is Wagner’s Ring cycle. In it, Brunnhilde loses her divine status. In the last opera. Gotterdammerung, to remove the curse of the ring at the center of the plot, she creates a bonfire in which she immolates herself. That fire burns down the gods themselves. We’ve said that Germany’s refusal to relent on its contradictory policies, that of running sustained trade surpluses, not being willing to finance its trade partners, and not supporting more European integration, most of all Federal-level fiscal spending, will burn down Germany’s export markets and eventually engulf Germany itself. Will Merkel be cut down to size in the estimation of history from her current revered status? Gotterdammerung has a much longer running time than any of the great Greek tragedies, so it will take some time to see if the Germans play true to form.
* And that’s aside from the fact that the referendum appears to violate the Greek constitution (not that that is a matter to be decided by the creditors, mind you, that’s internal to Greece, but it allows for more unfavorable messaging in the press). Per the Financial Times:
The referendum also raises legal questions. Patroklos Koudounis, head of the Athens-based Adequate group risk consultancy, said the Greek constitution stipulated that referendums were not allowed on fiscal issues. “In the way that Mr Tsipras described the question, it appears that question falls within the category of fiscal issues,” he said.
** As Nathan Tankus notes by e-mail:
There would be an argument that the Bank of Greece should print Euro banknotes because the ECB is supposed to preserve the integrity of the payments system above all other goals. I say would because the Bank of Greece can’t legally take any direction from politicians so Syriza can’t make that case at all. In realpolitik terms, if ELA was cut off Bank of Greece officials would be told (officially or unofficially) to not print any more banknotes. If Syriza took over the Bank of Greece and started delivering Euros to the banking system I would not be surprised if proceedings to suspend Greece from the EU began very quickly (under the pretense that there was significant threat to the “rule of law”). Once they were suspended the other member states would have great leeway to punish Greece for their transgressions.
Remember we do not see this sort of raw power play as imminent. The ECB has kept itself out of the headlines as much as possible and no doubt would prefer to keep it that way. It would only go to these lengths if the Eurozone members were of the view that Greece had breached Eurozone rules in a serious way.