The imperative economic realities for the Greek Prime Minister Alexis Tsipras will not be altered noticeably after his crushing win in yesterday’s referendum. His ‘no’ (OXI in Greek) option marked an overwhelming victory meaning that the Greeks rejected the latest offer from the country’s creditors. To be reminded, during the past five months the Greek government and its creditors (the European Union, the European Central Bank and the International Monetary Fund) have been negotiating over the extension of the country’s financial support program.
Last Friday, Alexis Tsipras left the negotiations table and announced a referendum to ask the Greek people if they accept or reject the latest offer by the creditors, which he himself considered unacceptable. The outcome of the referendum immensely strengthens Tsipras’s internal position but this may have limited impact on his negotiating status with the creditors. Actually, it may be a disadvantage towards key ‘adversaries’ like the German minister of Finance Wolfgang Schäuble. Berlin could estimate that a Greek win in the negotiations may encourage a similar attitude from Spain’s Podemos and other non-conventional parties favouring the anti-austerity policies that Germany detests.
A difficult Monday in Brussels
Given all that, the Greek government, despite its big win in the referendum is not going to have an easy day in Brussels. The same is true as far as the internal financial situation in Greece is concerned. Celebrations will not last long in the prime ministerial mansion. The situation of the Greek banks remains precarious.
The six working days bank holiday that the Tsipras government imposed on the country’s banks to protect the faltering financial system from a fast accelerating bank run expires today. Today they have to decide what to do next. If the banks open their doors normally it’s highly probable that they will be quickly forced to messily shut down again due to anxious depositors asking for their money back. Such a prospect will have devastating repercussions on the entire economy, the political scenery and the stressed social conditions, not to say anything about the banks themselves.
If the bank holiday is extended for a few more days, the burning liquidity problem will just be postponed for a few days. In short, if the Greeks want to see the bank ATMs restart producing euro, their government has to quickly come to terms with the creditors. Only then will the European Central Bank recommence its liquidity injections to the Greek banking system. However, the negotiations cannot last longer than two and at most three weeks. This is the longest interval the country can subsist without an operational banking system. It will be the first time in economic history that a developed economy is tested how long it can last without a banking system.
It’s a matter of days
Under such conditions and in the short-term, the option of the introduction of a national currency – possibly minting a new drachma after a Grexit from Eurozone – is out of question or will be realized under dramatic conditions and cause total chaos. Athens banking sources estimate at least a number of months the time needed to accomplish such a demanding operation. In any case, the banking system lacks the liquidity to support such a long passage, so the chaos is rather guaranteed if Greece chooses to introduce a new currency.
There will be repercussions also outside Greece. Despite the fact that Eurozone and the world is now better prepared than in 2010 or 2012 to confront a financial crisis caused by a Greek default, the truth remains that nobody is immune and the overall effect cannot be estimated. The bubble lurking in the derivatives markets estimated at around $700 trillion may burst at any time. The detonator may be hidden in Athens.
Consequently Greece and its creditors, the European Union, the European Central Bank and the International Monetary Fund have an obligation vis-à-vis the rest of the world to swiftly come to terms and conclude an agreement. To achieve this, the two sides must sit on the negotiation table right from today, no matter the outcome of yesterday’s plebiscite. This is not at all a simple thing though because all along the past five years similar negotiations proved that achieving a viable solution proved impossible for very important political and financial reasons. It was either the Greek or the German Parliament that couldn’t endorse an agreement suspected to favor the other side. But it’s not only that. In this five-year long confrontation a lot of things have been totally out of place, first of all the IMF and the ECB. Let’s dig to that.
The ECB sitting across the table from Greece
During the arduous negotiations to settle the Greek problem, the ECB has been sitting on the opposite side of the table together with the IMF and the EU Commission facing an isolated Greece. It was the first time in the history of the IMF that a country asking for a bailout due to a sovereign debt crisis has its central bank sitting on the same side of the table with the Fund. This arrangement has left the poor country alone to face the omnipotent Fund without the help of a central bank or decisive backing from its Eurozone partners. It was EU-ECB-IMF versus Greece right from the beginning.
It becomes clear then that Athens has entered this five-year long continuous negotiations with the IMF without having a central bank on its side. In short, the crisis proved that Greece after having joined the Eurozone and having surrendered its monetary policy to the ECB, remained without a central bank deprived from a monetary policy, because the ECB was on the other side of the table.
A country without a central bank
On top of that, the central bank, a non elected body, ended up forcing its fiscal and economic policy views on a sovereign government. The first time such arrangement was rehearsed for a banking crisis was in the case of the Irish crisis in 2011 and then repeated in Cyprus in 2013. In the first case, Jean-Claude Trichet, the then President of the ECB, forced the Irish government under the threat of liquidity asphyxiation, to underwrite the toxic debts of the country’s private banks.
The obvious target was to salvage the ‘too big to fail’ French and the German lenders who had imprudently lent huge amounts of money to the private Irish banks. Fortunately, Ireland was fiscally in perfect condition before the crisis and its public debt was just 20% of GDP, so it could cope with this burden and actually its economy has now started growing again. However, the Irish public debt is today stuck at 120% of the GDP. Clearly, the Irish taxpayers are burdened with an extra sovereign debt equal to one annual product which was spent to support the French and German banks, without any help from Berlin and Paris.
Athens after Dublin
Exactly the same liquidity asphyxiation threat strategy was previously used by the ECB in the case of Greece back in 2010 and again in 2012 leading to an unseen before over indebtedness. The country was already over indebted in early 2010 and the new burden equal to at least 60% of GDP – used to save the French and the German private lenders to Greece – triggered a fine mess that cannot be resolved without a haircut. No country can service a debt of 180% of its GDP. As in Ireland, the ‘too big to fail’ banks of Germany and France had imprudently lent huge amounts in this case, to the Greek government. There is crosschecked information that in the short period between January – February of 2009 those banks imprudently lent a round sum of €60bn to Greece.
During 2010 and 2011 the ECB under both Jean-Claude Trichet and Mario Draghi bought the toxic Greek debt from the German and the French banks at almost nominal prices in flagrant violation of its statutes. Again in violation of the EU Treaties, the ECB this time under Mario Draghi, is now blackmailing Athens to continue servicing those debts using as a ‘convincing argument’ the discontinuation of the emergency liquidity assistance (ELA) to the Greek financial system.
A central bank just for a few
In reality, the ECB treated Ireland and Greece as complete outsiders, that is to say foreign countries, which have just been using the euro. In this way, the ECB in Frankfurt repudiated all its obligations towards Ireland and Greece as their central bank. In reality, the ECB bullied Athens and Dublin as a real enemy, as if it had no obligations whatsoever to those two nations. If the Treaty permits such things to ECB, then there is a severe fault in Eurozone’s foundations.
Unfortunately, the outcome of yesterday’s referendum cannot change that, but it can remind everybody that there is something rotten in the euro area which has to change. A non elected body is still able to trample a minor member state’s government and ignore the voice of a nation as expressed in a plebiscite. Until these faults are remedied, and there is no indication that this can be done soon, Greece will remain at the mercy of ECB’s Governing Council servicing the interests of the central Eurozone countries, in violation of its statutes.