You Never Give Me Your Money/ You Only Give Me Your Funny Paper

30 June 2015, 0526 EDT

I would like to cut through a lot of the rhetoric and discuss where we are with the Greece crisis and where we are likely to be quite soon. I will conclude with some thoughts as to why this has been an enormous failure on the part of Syriza and the intellectual left that has supported it, and it will come with a very high cost. TL;DR: Wishful thinking is no substitute for real analysis. The European North made its position on indefinite financing of the South (and East) clear before the euro came into being. In fact, that was a condition for the euro to come into being. It has not changed. The deal was fundamentally the same in 1997 as it is today and will be tomorrow.

Here’s where we are:

1. In a series of moves, mostly in 2012, Greece’s debt was “restructured”, which mostly means that lenders accepted 75% losses in exchange for the remainder being transferred onto the balance sheets of European governments, the European Central Bank, and the IMF. In other words the banks ate 75% of the money and European taxpayers became responsible for the rest. So if Greece defaults now it will be defaulting on Europe’s citizens, not its banks. The banks have already taken their hit. Saying that this crisis is the result of Germans and French wanting to protect their banks has not been true for years if it ever was.

2. Until now, Greek debt held by Greek banks could be used as collateral at the European Central Bank, despite the fact that Greek debt is well below investment grade, through the Emergency Liquidity Assistance (ELA) authority. This is important, because Greek citizens have been draining Greek banks of euros since Syriza won the last election, while effectively transferring public debt owned by their citizens to the citizens of other eurozone countries, via the central banks as conduit. Without this program the Greek financial system will collapse, as it appears to be doing as I type. It is important to note that denial of access to ELA was the primary mechanism by which European authorities pressured Irish and Cypriot authorities into “resolving” their rolling banking crises in 2010 in 2013.

3. Greece has received more than 100% of its GDP in direct fiscal assistance from Europe (and the IMF) over the past few years. It is these monies that they are very likely to repudiate now.

For more details here’s one good explainer. And another.

Syriza’s position since it won in Greece’s January election has been that it has a mandate to renegotiate the terms of its repayment to Europe. Europe’s position has been that deals are not renegotiated by one party to them alone, and that they have responsibilities to their citizens as well. Now Syriza has called for a referendum, asking the Greek people to vote in favor of accepting the terms of conditions or rejecting them. Regardless of the result, claims Syriza, Greece has no intention of exiting the euro or renouncing its debt. In so doing, Prime Minister Tsipras has explicitly said that he hopes this will improve his bargaining position:

This is, to put it bluntly, unlikely. The problem is not that the “Troika” (the European Commission, the International Monetary Fund, and the European Central bank, representing Greece’s creditors) do not know that the Greek people dislike austerity. They know it very well. Thus, this referendum will reveal no new knowledge. Since it does not, its impact on the distribution of bargaining power will be nil. (Unless, of course, Greece votes to accept the deal, in which case Syriza is dead.)

The problem is that there is now no deal on the table. The Troika have no made official proposal that could be rejected. The previous bailout expires on Tuesday. And the ELA aid program from the ECB will also be restricted. So Greece will go to the polls on July 5th to reject a non-existing package of debt repayment. They are certainly within their rights to call such a referendum — just as Prime Ministers Merkel, Hollande, Rajoy, Renzi, Michel and others would be within their rights to call referenda of their own. It’s just hard to imagine what this is intended to accomplish.

So we will have a #Greferendum. This act alone guarantees a default on its payment to IMF. (The IMF doesn’t like to be defaulted upon, because if it accepts defaults it ceases to function as an international stabilization institution because member governments won’t fund it. Love the IMF or hate it, borrowing countries would be worse off without it.) In addition, Greek banks will remain closed indefinitely in an attempt to stem the ongoing bank run, and capital controls have now been put in place to restrict Greek citizens (and foreigners, if any of them still have cash in Greece) from taking their currency out of the country. This despite promising to do no such thing earlier on Sunday:

https://twitter.com/BennSteil/status/615322579625246720

That’s how quickly control over the situation can be lost, and Syriza has now lost it. But Varoufakis isn’t wrong; the truth is that Greece is effectively no longer a part of the monetary union. ELA has been “capped” (i.e., cut off). And though the Syriza government refuses to admit it, the July 5th referendum is about whether to stay in the monetary union at all. In fact, the referendum’s ostensible purpose — to accept or reject the Troika’s proposal — is completely impractical because there no longer is a proposal on the table. Nor, after Tuesday, will there be any existing plan, as the current one expires on that date. As of now Greece is fully adrift.

So the fundamental issue remains what it always has been: Greece wishes not to repay. Most expert observers believe that the Troika is willing to accept substantial non-repayment, but not for nothing. That is, they want the consequences to be painful enough that countries will do everything in their power to resist falling into similar straits in the future. Not least Greece, which is still unable to match its spending to its income and so is not on a sustainable growth trajectory. Greece managed a very small primary surplus — government revenues minus expenditures, ignoring debt repayments — last year, but the Troika wishes to see a larger one sustained for longer before it is sure that Greece’s finances are sound.

Syriza is unwilling to agree to this and has, in my mind anyway, acted completely irresponsibly since it came onto the national scene. Its campaign promises were ludicrous, and it has steadfastly refused to accept the fact that it has very little leverage. It has spent the past 6 months doing everything except craft a credible plan to return Greece to growth whilst remaining in the eurozone, instead choosing to link contemporary Germans to the Nazis. It has behaved as if the only democratic will that matters is that of its citizens, none others, and has not acknowledged the quite extraordinary lengths that the rest of Europe has gone to to keep Greece solvent. It has insulted European partners who are poorer than Greece but are nevertheless being asked to subsidize its relatively generous welfare state:

“We are much poorer than the Greeks, but we have performed reforms,” Rosen Plevneliev, the president of Bulgaria, a northern neighbor of Greece, said in an interview. “When you have a problem, you have to address it and not shift it to Brussels or onto somebody else,” he said, deriding Syriza’s complaints that Europe had let Greece down. …

When Greece’s finance minister, Yanis Varoufakis, in an early round of negotiations in Brussels, complained that Greek pensions could not be cut any further, he was reminded bluntly by his colleague from Lithuania that pensioners there have survived on far less. Lithuania, according to the most recent figures issued by Eurostat, the European statistics agency, spends 472 euros, about $598, per capita on pensions, less than a third of the 1,625 euros spent by Greece. Bulgaria spends just 257 euros. This data refers to 2012 and Greek pensions have since been cut, but they still remain higher than those in Bulgaria, Lithuania, Latvia, Croatia and nearly all other states in eastern, central and southeastern Europe.

Such statistics have made it very difficult for Syriza to win support for its argument that Greece is suffering a uniquely painful “humanitarian catastrophe” and that fellow European Union countries ought to put up their own money to save Athens from bankruptcy. “Greece is not seen as suffering so much,” said Ognyan Georgiev, an editor at Kapital, a Bulgarian business newspaper. “They have the sea, they have big pensions and they have a life that looks better than what we have.”

Syriza’s biggest threat is to walk away from the currency union, but the eurozone would be stronger without Greece while Greece would suffer immensely from being excluded. The rest of the world economy won’t be affected at all. And, if the EU decides to retaliate by expulsing Greece from the Common Market they would also lose preferential access to the world’s largest market and the ability to emigrate freely. Meanwhile, the European Commission appears to be united against Greece, with all 18 ministers signing statements rejecting Syriza’s proposals and Tsipras’ decision to hold a referendum.

In other words, Syriza has taken a bad situation and worsened it significantly by refusing to understand that Greece has no claim on the rest of Europe. It has tested Europe’s patience by refusing to craft a credible plan for budget stability that does not rely on continued financing from Europe. And now it faces a referendum that seems likely to repudiate these actions, which would then probably collapse the Greek government and waste even more time while the economy collapses further.

It has been a stunningly poor 6 months for Tsipras and Syriza. It would be difficult to imagine anything worse.