The scenarios for Greece — none of them happy
by Wolfgang Münchau,
2015-06-30 08:01:37.0
WHEN a shock you predicted actually happens, it still feels like a shock. Greek Prime Minister Alexis Tsipras was right to walk away. But it was a momentous decision nevertheless when he rejected an offer that would have allowed Greece to pay its debt to the International Monetary Fund (IMF) and the European Central Bank (ECB). What I am struggling to understand is why he suddenly decided to call a referendum on whether to accept a bail-out.
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 at midnight tonight. Why should the Greeks vote yes on Sunday to a package the creditors themselves no longer support?
By far the biggest tactical error at the weekend, however, was the rejection by eurozone finance ministers of a five-day extension of the Greek bail-out programme to beyond the referendum. With that decision, they foreclosed the only way to keep the show on the road. They have unwittingly strengthened Tsipras’s political argument. He will now be able to say first the creditors wanted to destroy the Greek economy with their austerity programme. And now they are hoping to destroy Greek democracy.
To see where all this might be going, it is instructive to go through the scenarios, eliminate the implausible and see what is left. If the referendum 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 bail-out may be interpreted as a vote in favour of remaining in the eurozone. In that case, I would expect the Greek government to maintain a regime of capital controls and introduce a parallel currency, denominated in euros. This parallel currency scenario could split into three directions: Grexit within a short time; a regime where Greece defaults but continues the capital controls indefinitely; and a scheme where the controls are eventually lifted and Greece remains in the eurozone.
The last would require a resolution for the Greek banks. That would be the ideal scenario but it is hard to do. As 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.
Specifically, it would require a programme by the European Stability Mechanism, the rescue fund, to bail out the Greek banks. The purpose would be not only 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. The ECB is already pushing the legal limits of what it can do. It continues emergency liquidity assistance 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. The parliaments of the creditor countries would be asked to come up with money for the Greek banks, while the Greek state defaults on them.
I leave readers to work out the mathematical probability of such an event, and move on to the next scenario.
Now assume there is a large yes vote. Tsipras resigns. Elections follow. Assume these elections produced a pro-austerity coalition. 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 have dealt before with Antonis Samaras, the head of New Democracy. When he was prime minister 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. The 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 votes yes but Greece is still forced out of the eurozone because the creditors and the ECB leave them no other choice?
This scenario would be the most toxic of all. It would imply that a monetary union without political union can exist only in violation of basic principles of democracy.
It will come to be perceived as a totalitarian regime.
© The Financial Times Limited 2015
Alexis Tsipras. Picture: REUTERS/ALKIS KONSTANTINIDIS
WHEN a shock you predicted actually happens, it still feels like a shock. Greek Prime Minister Alexis Tsipras was right to walk away. But it was a momentous decision nevertheless when he rejected an offer that would have allowed Greece to pay its debt to the International Monetary Fund (IMF) and the European Central Bank (ECB). What I am struggling to understand is why he suddenly decided to call a referendum on whether to accept a bail-out.
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 at midnight tonight. Why should the Greeks vote yes on Sunday to a package the creditors themselves no longer support?
By far the biggest tactical error at the weekend, however, was the rejection by eurozone finance ministers of a five-day extension of the Greek bail-out programme to beyond the referendum. With that decision, they foreclosed the only way to keep the show on the road. They have unwittingly strengthened Tsipras’s political argument. He will now be able to say first the creditors wanted to destroy the Greek economy with their austerity programme. And now they are hoping to destroy Greek democracy.
To see where all this might be going, it is instructive to go through the scenarios, eliminate the implausible and see what is left. If the referendum 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 bail-out may be interpreted as a vote in favour of remaining in the eurozone. In that case, I would expect the Greek government to maintain a regime of capital controls and introduce a parallel currency, denominated in euros. This parallel currency scenario could split into three directions: Grexit within a short time; a regime where Greece defaults but continues the capital controls indefinitely; and a scheme where the controls are eventually lifted and Greece remains in the eurozone.
The last would require a resolution for the Greek banks. That would be the ideal scenario but it is hard to do. As 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.
Specifically, it would require a programme by the European Stability Mechanism, the rescue fund, to bail out the Greek banks. The purpose would be not only 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. The ECB is already pushing the legal limits of what it can do. It continues emergency liquidity assistance 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. The parliaments of the creditor countries would be asked to come up with money for the Greek banks, while the Greek state defaults on them.
I leave readers to work out the mathematical probability of such an event, and move on to the next scenario.
Now assume there is a large yes vote. Tsipras resigns. Elections follow. Assume these elections produced a pro-austerity coalition. 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 have dealt before with Antonis Samaras, the head of New Democracy. When he was prime minister 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. The 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 votes yes but Greece is still forced out of the eurozone because the creditors and the ECB leave them no other choice?
This scenario would be the most toxic of all. It would imply that a monetary union without political union can exist only in violation of basic principles of democracy.
It will come to be perceived as a totalitarian regime.
© The Financial Times Limited 2015
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