Since Prime Minister Alexi Tsipras called a referendum in Greece over austerity measures on Saturday morning, a number of developments have emerged that influence the correct conduct and result of this exercise.
1. Tactical Errors in Ending the Negotiation
The first error is that the SYRIZA-ANEL government appears to have made a tactical mistake by calling the referendum on Friday night / Saturday morning, while the final Eurozone meeting was scheduled for later on Saturday, 27 June. This has allowed the Europgroup to issue a statement in which Greece has left the discussions unilaterally. It has also allowed European officers (including Jean-Claude Juncker) to present a draft loan agreement with what are termed “significantly better” conditions for Greece. (These terms were not released in advance, so we do not know if the revisions were made prior to the decision to call a referendum, or subsequent to it). A better approach would have been to get a final copy of the proposals, then declare a referendum, in agreement with the Eurozone negotiators.
2. Withdrawing the Eurogroup Offer
After hearing of the referendum, the Eurogroup simply withdrew the offer under negotiation. Prime Minister Tsipras’ later attempt to extend the Greek rescue programme by one month failed. (He has since resorted to writing to individual Eurozone heads of state). By withdrawing the offer, the Eurozone accomplished two things:
- It made it clear in no uncertain terms that if Greece wanted to play “hardball”, it could do the same.
- It assured that since there would be no extension, any non-payment of Greek public sector debts past June 30 would be technically considered a default.
3. The Blame Game
It is obvious that both SYRIZA-ANEL and the Eurogroup are now engaged in damage control, a key component of which is blaming the other side for the impasse. The Eurogroup’s press statement, for instance, refers to “pro growth” measures. These are hard to find in the draft loan agreement: nearly all these measures are regressive or recessionary. SYRIZA, in contrast, is claiming that the Eurogroup is “blackmailing Greece with telegrams”, ignoring the fact that the other 18 Eurozone countries have absolutely no obligation to “negotiate” ad nauseum, nor to lend further taxpayer funds to a government that has made the errors of the magnitude the SYRIZA-ANEL have made over the past 5 months.
4. The Tsipras Press Conferences
Prime Minister Tsipras has held two press conferences: the decision to implement a referendum on Saturday morning, and a second one upon announcing capital controls on Sunday. In both, the words “blackmail” resound. His case is that by not extending either the bailout negotiations, and with the ECB not increasing ELA, the Greek “democratic right to a referendum” is being blackmailed.
But this is not the case. Democracy in the European Union and Eurozone is symmetric. Greece has democratic rights. But so do 18 Eurozone member states who, over the past 5 months, have wasted endless hours in useless meetings with the Greek government. They, like Greece, have a sovereign right to decide whether or not to lend more money to a government headed by a prime minister who regularly accuses them of pillaging and blackmailing Greece, even while asking them for new refinancing.
By declaring a referendum at the last minute (3 days before the Greek rescue programme expires), with the referendum taking place after the date of programme expiration and without any prior consultation, Prime Minister Tsipras has misplayed his hand.
I am speaking tactically here, not fundamentally. Greece has every right to a referendum. Given the real economic challenges of austerity and the constant demagoguery of successive Greek administrations and political parties, it is definitely time for Greek citizens to decide.
5. The Role of the European Central Bank
Prior to its meeting on Sunday, June 28th, the European Central Bank had the following choices regarding ELA:
- Declare that all ELA would end on June 30th once the Greek programme expired. This would mean the closure of the Greek banking system. ECB President Mario Draghi mentioned this very explicitly to Prime Minister Tsipras.
- Continue ELA but require a greater haircut on collateral offered in the form of Greek government guarantees or bonds. This essentially would have results in a liquidity equilibrium a the time of decision.
- Cap ELA (which is what happened) – thus also creating a liquidity equilibrium at the time of decision.
- Increase ELA with no changes to collateral, thus allowing Greek banks to continue operations in the face of massive deposit withdrawals.
It chose option 3, which is probably the best choice in a very difficult situation. ELA is not a “democratic right” of any Eurozone country. It implies real adherence to standard banking rules and monetary practise, including the inflexible commitments of the ECB itself. Increasing ELA without a sound banking or political system, and in a country determined to “tear up the loan agreement” and openly flirting with unilateral default would never be accepted by any independent central bank.
6. Capital Controls and Deposit Flight
The issue of capital controls is a direct consequence of the deposit flight seen in recent months. Greek depositors no longer feel secure in the Greek banking system, and have been withdrawing massive amounts in the last 4 months (and for the past few years). There are four options to end capital controls:
- Greek depositors could simply re-deposit what they have removed, thus improving the ratio of loans-to-deposits and bringing Greek banking core tier 1 ratios and/or liquidity buffers back into manageable levels. The chances of this happening are minimal.
- The ECB would agree to increase ELA, accepting Greek government guarantees or bonds as collateral, or reducing the haircut on collateral already held. As already mentioned, this is not going to happen.
- Finding new sources of cash deposits, most likely from external sources (also not going to happen).
- Finding new investors to recapitalize the Greek banking system through equity investments (also not going to happen).
A fifth option would be to shrink Greek bank assets and non-performing loans in parallel to the shrinking deposit (liability) base. This is impractical given the short time frames involved.
The point here is that deposit flight is not the result of Eurogroup “blackmail”: it is the result of a lack of trust by Greek depositors in the safety and stability in the Greek banking system and, inter alia, in the SYRIZA-ANEL government. The fact that prominent SYRIZA ministers were photographed making cash withdrawals on Saturday morning hardly helps.
7. Threats to the European Monetary System
Another point totally misunderstood by SYRIZA-ANEL and many Greek citizens is that the present course of engagement by the Greek government threatens the entire European monetary system, which is a voluntary, rules-based system. Greece has been in violation of these rules nearly every year since it joined the ERM and the Euro. These are not minor violations: they are major ones. It is unreasonable to expect that Greece’s European partners would not take measures to save their own currency union. To suggest that Greece will “force the Eurozone to change” given SYRIZA-ANEL’s current negotiating tactics and Greece's abysmal policy record is naivety of epic proportions.
These points bring me to comment on the referendum itself. My comments on information asymmetry are the following:
- Under normal circumstances, a referendum would be an excellent way of answering the basic question as to whether the Greek public is intent on honouring its commitments to the present loan programme and to its wider European Union membership. After all, it is the Greek taxpayer that must bear the majority of the austerity burden, so it is only fair that s/he has a direct say in the matter.
- However, the way in which the referendum is being organised almost guarantees that there will not be an objective result. The two governing parties are openly campaigning for a “no” vote (i.e. no more austerity), in many cases using deliberate misinterpretations of the offer. In other cases, a “no” is being equated with patriotic duty; a “yes” is being associated with being a traitor or a quisling.
- While the consequences of a “yes” vote are known, no government authority has explained what the consequences of a “no” vote will be. A “no” vote will include its own inevitable austerity requirement. The Greek economy is in free-fall at the moment: the primary surplus has vanished. SYRIZA-ANEL have not made clear what taxes they will raise, or what expenditure they will cut, the day after the referendum. “We will wait and see” appears to be the response of one minister.
- The referendum mentions two specific documents which purport to discuss creditor objectives for Greece: (a) “Reforms for the Completion of the Current Program and Beyond“ and (b) “Preliminary Debt Sustainability Analysis”. It is doubtful how many votes will be economically and linguistically literate enough to understand these, but I would hazard that this would be not more than 2% of the population.
- The Eurogroup itself has withdrawn its (purported) offer. Essentially, Greece will be voting on an offer which no longer exists.
- A “no” vote does not cancel Greece’s sovereign debt, 80% of which is in the hands of official sector creditors. Greeks should not believe that, under the rubric of “democracy”, this debt will be cancelled.
- The real question of the referendum should not be construed as “yes to austerity” or “no to austerity”, but “yes to sovereign commitments” or “no to sovereign commitments”. Austerity has to continue in Greece, in the absence of any other financial resources for public expenditure. These are two very different issues, but the “no” camp is choosing to focus on the issue of “democracy” rather than the issue of “commitments.” If the answer is “no”, then Greece must be prepared for very adverse consequences from its European partners and from world markets. There should not be any doubt about this.
- Greece has freely committed to a European Union of shared sovereignty and a common currency. It has every democratic choice to default on its debt or withdraw from the Euro or even the European Union. But it should not believe that its European partners also do not have a democratic choice to take their own retaliatory measures, especially since Greece will be placing € 240 billion public funds from the Eurozone and IMF at risk.
- As before, we have still not heard of a single structural reform or “real economy” pro-growth measure that the SYRIZA-ANEL government is proposing that will actually be quickly implemented. There is a nebulous commitment to privatisation and cracking down on tax evasion, but no specific plans which the government itself has not, through its own actions, cancelled. The economy of any country is far greater than public spending, yet SYRIZA-ANEL have no plans at all for the private sector, except as an apparent source of taxation.
This article has focussed extensively on the Greek side of the equation and the policy decisions made by the Greek government. I believe that although some of these are legitimate (and many Eurogroup decisions have been wrong, as I have written elsewhere), SYRIZA-ANEL has badly mishandled the entire debt negotiations and the referendum.
As a result, their complaints about a lack of democracy or of “blackmailing” appear to be a concerted attempt to mislead the public about the real causes and effects of the Greek situation. This diminishes the trust millions of Greeks have in their government, let alone the deleterious impact this has on Greece's European reputation. This does not bode well for the future.
(c) Philip Ammerman, 2015
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