The road to Grexit and beyond
When a shock you predicted actually happens, it still feels like a shock. Alexis Tsipras was right to walk away. But it was a momentous decision nevertheless when the Greek prime minister rejected an offer that would have allowed it to pay its debt to the International Monetary Fund and the European Central Bank. What I am struggling to understand is why he suddenly decided to call a referendum on whether to accept a bailout for next Sunday.
There might be some super-smart strategy behind this beyond my capacity to comprehend. The problem with the referendum is that the offer on which the Greek people are asked to vote is no longer on the table. And the programme to which it relates expires today at midnight. Why should the Greeks vote Yes to a package the creditors themselves no longer support?
By far the biggest tactical error committed over the weekend, however, was the rejection by Eurozone finance ministers of a five-day extension of the Greek bailout programme to beyond the referendum. With that decision, they foreclosed the only way to keep the show on the road. They have unwittingly strengthened the political argument of the Greek prime minister. To see where all this might be going, it is instructive to go through the various scenarios, eliminate the implausible and see what is left.
If the Greek referendum on Sunday goes ahead and concludes in a No vote, Grexit probably beckons. If the result is a Yes, there will be initial confusion. A vote to accept the bailout may be interpreted as a vote in favour of remaining in the Eurozone. In that case I would expect the Greek government — whoever that may be after a Yes vote — to maintain the regime of capital controls and introduce a parallel currency, denominated in euros.
A parallel currency scenario could split into three directions: Grexit within a short time; a regime where Greece defaults but maintains the capital controls indefinitely; and a scheme where the controls are eventually lifted and Greece remains in the Eurozone.
The latter would require a resolution for the Greek banks. That would be the ideal scenario but it is hard to do. Since the Eurozone lacks a true banking union, the only route to bank recapitalisation would be through another round of negotiations between Greece and its creditors.
Need for open minds and positive attitudes
Specifically, it would require a programme by the European Stability Mechanism, the rescue fund, to bail out the Greek banks. The purpose would not only be to strengthen the banks, but also to ring-fence their capital from the Greek state. In the meantime, the ECB would need to keep up its programme of Emergency Liquidity Assistance (ELA).
The ECB is already pushing, and may soon be breaching, the legal limits of what it can do. It continues the ELA for now, but has capped the amount available for lending. As a result the Greek government decided to close the banks and impose capital controls. For a bank recapitalisation scheme to work, the European governments and Greece will need to come together very quickly, with an open mind and a positive attitude.
Now assume there is a large Yes vote. Tsipras resigns. Elections follow. Assume these elections were to produce a pro-austerity coalition. The question then arises: would the Eurozone offer Greece a new deal? Of course not. It would have to be a completely new programme, since the old one expired. Greece will, by then, have defaulted on both the IMF and the ECB. The creditors dealt with Antonis Samaras, the head of New Democracy, before when he was prime minister. When he was in power, he made promises that were not fulfilled. By the time trust is rebuilt, the Greek economy will be in full meltdown.
The conclusion I draw is that there are two probable outcomes. This first is an indefinite regime of capital controls, perhaps with a bank restructuring later as part of a broader package of debt relief. This would leave Greece inside the Eurozone.
The second scenario is Grexit. The first would be preferable. The second would still be preferable to the deal Tsipras rejected, or a return to a pro-austerity consensus.
My biggest concern is a political one. What happens if the Greek electorate voted Yes but Greece is still forced out of the Eurozone because the creditors and the ECB left them no other choice? This scenario would be the most toxic of all. It will imply that a monetary union without political union can only exist in violation of basic principles of democracy. It will come to be perceived as a totalitarian regime.