Tsipras Takes Door Number Three

Late last week, Greece’s creditors offered a bailout extension of several months, in the course of which Greece would have received sufficient funding to make all payments due during this time period. In order to receive this package the Greek government would have had to sign a final offer made by the creditors. If one looks at the details of the negotiations, only a tiny difference remained between the Greek offer and the offer made by the creditors in the end, reportedly amounting to approximately €100 million. This makes the Mr. Tsipras’ assertion that the final offer tabled by the creditors was an “affront to Greek dignity” not especially credible. It should be noted in this context that these arithmetic games are complete nonsense anyway. In light of €360 billion of public debt, does anyone really believe it will make an iota of difference whether the retirement age in Greece is increased in 2022 or 2025, or whether the small VAT exception for the tourism industry is revoked or not? We believe there are far more important reforms Greece needs to implement.

In the meanwhile, somewhere in Athens …

Photo via allaksogolies.gr

Obviously, all previous projections about Greece’s “debt sustainability” have turned out to be gravely mistaken. In the end, it all hinged on a trifle. However, Alexis Tsipras was already in hot water with the Syriza’s left wing with the offer he had made. In short, had he accepted the final offer tabled by the creditors, new elections would probably have become unavoidable. It would very likely have taken the votes of the opposition to obtain approval for the plan from Greece’s parliament. Tsipras would have been unlikely to retain political power in this case, as Syriza may have splintered and new elections would have been called.

And so he decided to take door number three, by announcing a referendum on the bailout plan to be held in a week’s time. He probably sees this as the only way he can conceivably stay in power. The Syriza government immediately started to urge voters to vote “No” to the bailout offer, a fact that has likely played a role in the euro-group’s decision not to extend the current program beyond its sell-by date. Moreover, euro-group politicians have to face their own parliaments and electorates as well. Various surveys show that patience with Greece has been running out among voters in Germany and elsewhere as well. Of course a Greek default will immediately saddle EU tax payers with huge losses as well, as what are ultimately already existing losses will finally crystallize on the balance sheets of governments guaranteeing EFSF loans to Greece as well as the ECB’s exposure to Greek debt.

The Trojan finger …

Cartoon via lectrr.com

The immediate problem with the announced referendum is that an IMF payment is due on June 30 – the day on which the existing bailout program expires as well. The IMF would have to agree to postpone a declaration of default, while the euro-group and the ECB would have to agree to formally delay the end of the ongoing program, so as to make further ELA funding to Greek banks possible. The creditors greeted this development with a loud and clear “Nein”, accusing Tsipras of once again employing delaying tactics. It is now time for “Plan B”, as one official remarked – the very Plan B we have been told numerous times actually doesn’t exist. We’re pretty sure this is in fact true – no-one expected this acrimonious end to the negotiations.

Greek citizens immediately rushed out to once again lay siege to ATMs, many of which were soon running out of money to dispense – as you can see above, even the ATM in the parliament building in Athens was quickly emptied out.

The circular nature of the bailout program: new bailout funds are needed to repay previously granted bailout funds, chart via the BBC

Is it exceptionally stubborn on the part of creditors to refuse to countenance a brief extension of the program to accommodate a referendum? There is actually a reason why their patience is wearing thin, if the remarks by numerous (usually unnamed) officials mentioned in various press reports can be believed. Allegedly Tsipras and Varoufakis frequently withdrew concessions that had already been agreed upon and occasionally publicly condemned proposals they themselves had originally made.

In short, they did everything possible to go on everybody’s nerves. Normally personal feelings shouldn’t enter into such weighty political decisions, but in spite of the seemingly impersonal character of the institutions they represent, the negotiators are all human and the increasingly dissonant mood has undoubtedly influenced them.

A last minute run on ATMs in Greece over the weekend.

The EU and Referendums

The EU’s power elite usually doesn’t do referendums. This was already made clear when former Greek premier Papandreou tried to go down that route a few years ago and was regime-changed post-haste. A referendum could give others in the euro area ideas, if not now, then eventually. However, it should also be pointed out in this context that Wolfgang Schaeuble, Germany’s minister of finance, actually did propose holding a referendum in Greece on the bailout plan several months ago already. At the time Tsipras and Varoufakis didn’t want to hear about it, instead preferring to wait until the very last second to surprise everyone with the referendum announcement.

The plot thickens …

Cartoon by Brian Gable

There is also the problem that in a multi-national group like the EU and the euro zone, it must be possible to strike agreements that cannot be abrogated at every opportunity. Nation states normally live in anarchy relative to each other, so to speak. This is no longer the case within the framework of the EU or the euro area: Its member countries agree to abide by a supranational body of laws and regulations once their governments sign the EU treaties. This cannot be changed by elections or referendums, unless they concern treaty changes, an accession to the EU, or a complete exit. Of course there is really not much the creditors can do about the Greek referendum – it will take place whether they like it or not. However, given that the euro-group has announced that the current program will run out on schedule, the referendum will actually be about a deal that will no longer exist by the time it is held.

German finance minister Schaeuble and his Greek counterpart Varoufakis – they have never seen eye to eye.

Photo credit: Krisztian Bocsi / Bloomberg

What Will Happen Next – Bank “Holiday” and Market Mayhem

Quite an interesting week awaits. Even if the Greek parliament hadn’t already voted 178:120 in favor of holding the referendum (interestingly, apart from the MPs of the governing coalition, the far right Golden Dawn party voted in favor), it would no longer possible to implement an agreement in time to ensure repayment of the tranche due to the IMF. Both Greece’s parliament as well as various other national parliaments in the euro zone would still have to vote on the deal before any funds could be released.

A Greek default is therefore already certain. On Sunday all eyes were on the ECB, as the central bank’s decision whether or not to continue to provide ELA (emergency liquidity assistance) is decisive in whether the Greek banking system will remain afloat or not. The ECB doesn’t want to be accused of pushing Greece over the edge and has already been playing fast and loose with its statutes ón many occasions in the course of the euro area crisis. In an attempt to strike a middle-of-the-road consensus, the central bank has now decided to freeze ELA at its current level of EUR 90 billion.

Assorted Greek ruins …

Cartoon by Deng Coy Miel

This means that Greek banks will no longer be able to honor withdrawal requests. Once again people are reminded that fractionally reserved banks are de facto insolvent without the backstop provided by a central bank with unlimited money printing powers. In spite of the Greek government’s constant assertions that bank deposits would remain accessible, they no longer will be as a result of the ECB’s decision to freeze ELA at current levels. As reported in the press:

“Greek banks are to remain closed and capital controls will be imposed, Prime Minister Alexis Tsipras says. Speaking after the European Central Bank (ECB) said it was not increasing emergency funding to Greek banks, Mr Tsipras said Greek deposits were safe.

Greece is due to make a €1.6bn (£1.1bn) payment to the International Monetary Fund (IMF) on Tuesday – the same day that its current bailout expires. Greece risks default and moving closer to a possible exit from the eurozone.

Greeks have been queuing to withdraw money from cash machines over the weekend, and the Bank of Greece said it was making “huge efforts” to keep the machines stocked. Greek banks are expected to stay shut until 7 July, two days after Greece’s planned referendum on the terms it had been offered by international creditors for receiving fresh bailout money. The Athens stock exchange will also be closed on Monday.”

(emphasis added)

Memo to Mr. Tsipras: Once one has lost access to one’s deposits, they are no longer “safe”. The very fact that ELA is needed to keep honoring withdrawal requests proves ipso facto that the banks don’t have the money that should in theory be “available on demand”. These deposits are not only not safe, for all intents and purposes they don’t even exist. Incidentally, Bitcoin has recently shown some strength, which is reminiscent of what happened around the time of the Cyprus depositor haircut. The only surprise is that the gold price hasn’t reacted yet to the situation, but perhaps it will now do so with a lag.

Any Greek citizens who haven’t emptied their bank accounts yet only have themselves to blame. The writing has been on the wall for quite some time and frankly, one had to be quite naïve not to see it. Promises by governments such as “the banks will definitely remain open” and “your deposits are safe” are almost always lies. Cyprus has already shown this, as has Argentina in the early 2000ds. The situation the Greek population now faces is a good reminder of this fact.

Bitcoin has begun to strengthen in recent weeks as negotiations between Greece and its creditors became increasingly stuck in the mud

The door to further negotiations has however still not been shut, in spite of appearances. Here is a pertinent collection of quotes from assorted creditor representatives:

“The head of the International Monetary Fund, Christine Lagarde, told the BBC that because the European part of Greece’s bailout program would have expired by 5 July, any referendum would relate to “proposals and arrangements which are no longer valid”. But she said that if there was a “resounding ‘yes'” to staying in the eurozone, then the response would be “a resounding ‘let us try'”.

Mr Dijsselbloem said the Eurogroup would continue to work with Greece and that many scenarios were conceivable. But he placed the blame squarely with Greece for walking out of negotiations on Friday. “They broke off their talks while they were still going on, while there was still time,” he said. “The only positive caveat I see is that the Greek parliament still has to take a wise position on that, and I hope that may lead to a different political situation.”

French Finance Minister Michel Sapin stressed that all the Eurogroup’s members wanted Greece to remain in the eurozone. “This is not a Greek exit from the eurozone,” he said after crisis talks between the Eurogroup and Mr Varoufakis on Saturday. “The 18 countries, apart from Greece, all said clearly that Greece was in the euro and should remain in the euro whatever the difficulties of the moment.”

(emphasis added)

In other words, in one way or another, the abominable circus is likely to continue anyway.

Stock markets are likely to come under pressure in coming days and it seems the recent hopium rally in the EuroStoxx Index is going to be erased in short order:

The Euro Stoxx Index is likely going to fall back toward the previous consolidation zone in an initial reaction. Breaking this support would likely see the next short term low in the 2800-2900 area coming into play.

The reaction of the euro will be most interesting. In the short term, the euro is likely to sell off, possibly quite sharply In the medium to longer term, losing Greece could well be positive for the currency though – that is, if Greece is actually lost.

Tsipras May Have Miscalculated

One question we keep wondering about is whether the outcome that is now at hand was planned by Syriza all along. In other words, were they simply stringing the creditors along, so as to give people time to empty their accounts and to see how far they could go in terms of getting concessions? Let us not forget, powerful Marxist figures in Syriza were in favor of a default and exit from the euro from the very beginning. It was merely not entirely clear where Alexis Tsipras himself actually stood with regard to that, and it still isn’t.

What they are apparently overlooking is that an agreement would have given Greece countless opportunities to continue to extract funds from the EU. After all, the bailout money is not the only form of EU funding Greece is receiving. On the other hand, as we have previously pointed out, there are radical elements in Syriza that regard the Venezuela model of Hugo Chavez as the ideal economic dispensation Greece should strive for. We doubt that a majority of the Greek citizenry sees things the same way, but that is a detail that has never mattered much to Marxists.

Admittedly, Greece’s citizens are quite confused. On the one hand, a solid majority wants Greece to remain a member of the euro area. On the other hand, Tsipras’ hard stance at the negotiations has met with widespread approval as well. Obviously, no-one particularly likes austerity imposed by the EU and IMF. It is therefore possible that Greece’s citizens will listen to Syriza’s admonition to vote “No” to the bailout plan, but the upcoming bank holiday may well result in second thoughts on the matter.

Moreover, recent unofficial polls actually indicate that a majority is currently in favor of signing a new agreement with the creditors (just not whatever offer happens to be on the table at any given point in time). In short, the outcome of the referendum may turn out not be to Syriza’s liking. One mustn’t forget, while Syriza only received about 26% of the vote in the election earlier this year. Its majority in parliament is primarily a result of the 50 “bonus seats” the election winner gets in Greece. In other words, it actually doesn’t have a particularly solid majority of the electorate behind it, and the referendum gambit may well turn out to be one bridge too far.

If the Greek government “loses” the referendum, it is difficult to see how it can avoid calling for new elections. In that case, Tsipras may well find himself losing power anyway. The EU would have achieved its tacit goal of regime change in Greece, and negotiations would undoubtedly resume once a new government was in charge.

Conclusion

The citizens of Greece find themselves in a pretty desperate lose-lose situation now and we certainly commiserate with them. However, generally speaking, the entertainment value of the Greek drama has greatly increased over this weekend. Plenty of market mayhem presumably awaits and it will be interesting to see how the mood in Greece evolves in the run-up to the referendum now that the ELA spigot has been turned off and capital controls and a bank holiday are imposed. We admit we have no idea how the Greek population will actually react to these developments. It may react with defiance if a majority agrees with the government’s view on the ECB decision, but it may just as well end up blaming Tsipras and Syriza for the situation.

While the Greek government is obviously painting the situation as being the ECB’s fault, the ECB is likely already overstepping its bounds merely by allowing existing ELA funding to continue. Once the Greek government defaults on June 30, Greek banks can no longer be considered solvent, since they are holding quite a lot of Greek government debt. In theory the ECB would have to cut off ELA completely, as it is not supposed to extend credit to insolvent institutions.

It is also possible that the Greek population will realize that Syriza cannot possibly keep its election promises, no matter what – at least not in real terms. Greece could begin to print its own currency following a default and the nationalization of the insolvent banking system so as to maintain the illusion that pensions won’t be reduced, but these nominally unchanged pension payments would likely soon decline far more in real terms that they would have under the agreement.

In the end, it could yet come to this:

Orthodox faith comrade waiting in the wings …

Cartoon by Marian Kamensky

That’s an outcome we are pretty sure the EU wouldn’t want to see.

Dr. Tsipras ready to administer his treatment

Cartoon by Paresh

Charts by:  BBC, Bitcoincharts, BigCharts