6.28.2015

Last Euro Days for Greece? A Silver Lining

Will the Cyprus bank run be repeated in Greece?  (photo source)
Grexit is fast becoming a reality and the blame game has exploded.

The Eurogroup of Ministers of finance were quick to push the Greeks out of their last-minute Saturday meeting that was supposed to wind up the bailout negotiations.

What happened? They reportedly slammed the door after a tweet announced that Prime Minister Alexis Tsipras had called for a referendum on the proposals of the "troika" - the  European Commission, the European Central Bank and the International Monetary Fund.

A tweet? I am amazed. It seems that Euro-zone Finance Ministers when they meet to discuss a serious matter like what to do with the Greek bailout are actually following Twitter on their phones. Not only that, but they immediately react by saying that if the Greeks go to a referendum, then they have nothing to discuss.

Exit the Greeks.

Perhaps finance ministers are obtuse and don't understand that at this point in the game, Grexit has stopped being a financial or economic matter, it is a political one. Tsipras's party won elections back in January on a promise to renegotiate the Greek debt and stop the austerity measures imposed by the troika. But European leaders, foremost the Germans, won't hear of it. More than that, as Ms Merkel pointed out, they've been "generous" in their offers, it's all the Greeks' fault.

A "generosity" that forces Tsipras to go back to the urns, because he knows he can't win the assent he needs from the Greek Parliament, half his party is against the troika's proposals. He has no other political choice than go back to the people. Yanis Varoufakis, the Greek Finance Minister, was crystal clear in his statement to the Eurogroup, telling them it both made sense and was democratic:
"Colleagues, the referendum solution is optimal for all, given the constraints we face.
  • If our government were to accept the institutions’ offer today, promising to push it through Parliament tomorrow, we would be defeated in Parliament with the result of a new election being called within a very long month – then, the delay, the uncertainty and the prospects of a successful resolution would be much, much diminished.
  • But even if we managed to pass the institutions’ proposal through Parliament, we would be facing a major problem of ownership and implementation. Put simply, just as in the past the governments that pushed through policies dictated by the institutions could not carry the people with them, we too would fail to do so."
And this is what the European leaders don't seem to understand. The Eurogroup took the unusual position that if there's a referendum in Greece about the troika proposals, then all proposals are off the table, implying that there was no need for a referendum.  According to the New York Times (here), Greece's fate is now in the hands of the European Central Bank. The ECB is currently keeping the Greek banking system on life support with ELA emergency funds, but the Chairman of the Bundesbank (yes, always Germany!) wants the ECB to turn off the spigot as soon as this coming Tuesday - when Greece defaults on its payment to the IMF.

In short, the Germans are determined to squash Greece.

And, as usual, the poor will pay. The bank run has been on for days now, and you can rest assured that the rich have already transferred their bank accounts out of Greece.

A monetary union implies collaboration, the strong should help the weak. That's the way it's done in America for the US dollar. Go tell the Germans. In fact, according to a recent poll, a majority of them (51%) want Greece out of the Euro and fully 70% rejected further concessions by EU partners to Greece.

The mainstream media is exceptionally meek in its reporting and quick to assign blame to Greece (for example, here). Only the Economist has done a fair job of analyzing the situation objectively, for example, "Greeks caught between Scylla and Charybdis" in Buttonwood's notebook, making the point that Tsipras played too close to the Charybdis whirlpool with his referendum and could sink. As a Greek Reporter article pointed out, Greece and Europe are both facing "unchartered waters", there can be "no winners in the Grexit game" (see here).

Greece is not Iceland, Greece is not Argentina, and the Euro is not the dollar. There are really no pointers as to what might happen next, even if contagion to the rest of debt-laden Southern Europe is (perhaps) unlikely now that the ECB can (supposedly) resort to QE (Quantitative Easing).

The Greek referendum on the Euro, scheduled for 5 July, is meant to answer the question whether Greeks can accept more creditor-imposed austerity as the price of staying in the euro, yes or no.
“Greek people are hereby asked to decide whether they accept a draft agreement document submitted by the European Commission, the European Central Bank and the International Monetary Fund, at the Eurogroup meeting held on June 25. - See more at: http://greece.greekreporter.com/2015/06/28/greece-referendum-polls-greeks-favor-agreement-yes/#sthash.jTtnPEzW.dpuf

As I write this post, the IMF has come forward with its own proposal, reported here in the UK Guardian's live stream, it came in at 16:33 on Sunday June 28.  Fascinating position, worth a close read, here it is, reproduced for you exactly as I read it:

Lagarde: IMF stands ready to help




International Monetary Fund (IMF) chief Christine Lagarde arrives for a Eurogroup meeting at the EU headquarters in Brussels on June 27, 2015. AFP PHOTO/ JOHN THYSJOHN THYS/AFP/Getty Images
Photograph: John Thys/AFP/Getty Images
JUST IN: A statement from Christine Lagarde, managing director of the International Monetary Fund, just landed in our inboxes.
Lagarde is reiterating that the IMF believes Greece’s debt sustainability needs to be addressed -- code for saying that the eurozone must put more money up. And the Fund is still prepared to work with both sides.
Lagarde says:
“I have briefed the IMF Executive Board on the inconclusive outcome of recent discussions on Greece in Brussels. I shared my disappointment and underscored our commitment to continue to engage with the Greek authorities.
“The coming days will clearly be important. I welcome the statements of the Eurogroup and the European Central Bank to make full use of all available instruments to preserve the integrity and stability of the euro area. These statements underscore that the euro area today is in a strong position to respond to developments in a timely and effective manner, as needed.
“The IMF also will continue to carefully monitor developments in Greece and other countries in the vicinity and stands ready to provide assistance as needed.
“I continue to believe that a balanced approach is required to help restore economic stability and growth in Greece, with appropriate structural and fiscal reforms supported by appropriate financing and debt sustainability measures. The IMF is prepared to continue to pursue that approach with the Greek authorities and our European partners.”

The key sentence is this one: "a balanced approach is required to help restore economic stability and growth in Greece, with appropriate structural and fiscal reforms supported by appropriate financing and debt sustainability measures." The Guardian says that this means the Euro-zone "must put more money up."

Of course that's what it means! Can anyone seriously think that the situation in Greece can be fixed without putting more money up?? It would be more important to focus on what the IMF is really saying: that reforms should be carried out, yes, but supported by appropriate financing measures that will ultimately result in a sustainable debt, i.e. a debt level that the Greek economy can live with.

It's the only reasonable, rational solution. And I am happy to see that the IMF is standing by it, ready to pursue that approach with all stakeholders.

This is yet another example of the excellence of our international institutions, something we tend to forget all too often, as we see the United Nations failing here and there, and being snubbed and ignored (as is the case for the ICC, the International Criminal Court). Remember, the IMF, along with the World Bank, were created in the same wave of generosity and vision that saw the birth of the United Nations.

Where is that generosity and vision now? Certainly not in the Euro-group!

So what happens next? My guess is that the IMF will extend the deadline on the payments Greece must make to it. Since the referendum is next Sunday 5 July, expect at least a 2-week reprival. But of course I could be wrong...And of course, all the usual things are likely to happen: bank holidays and capital controls.

And the outcome of the referendum? According to recent Greek polls, the Greeks are likely to vote yes. But the betting firm Ladbrokes has slashed the odds of Greece voting yes to just 1/3, in contrast to the 2/1 is was offering when it opened the books. So expect the Greeks to vote no!

That the Greeks are fed up with this charade should come as a surprise to no one. But the rest of the world should beware: the Greek economy may amount to only 2% of the European Union, but it could very well be a case of the tail wagging the dog. One thing it will do for sure, is to nip in the bud Europe's fragile recovery.

And when that happens, we can thank Ms. Merkel and her buddies for that. 

Update: Sunday night (June 28), Tsipras announced in a speech on TV that banks would be closed the whole week prior to the referendum and that capital controls would be put in place. My guess is that he is trying to "freeze" the financial situation and hoping to get support for the "no": that would give him a stronger hand if and when bailout negotiations resume.

With a "no" at the urns, Tsipras would be able to point out to the Troika that he is bound by his political pledge to reduce austerity. Perhaps that might help them to undestand that this was never an economic issue but a political one. But I suspect the IMF has understood that - it is just as technocratic as the other two (ECB and EU Commission) but appears to have a greater political sensitivity.

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