Saturday, June 27, 2015

The Moment of Truth for Greece

Greek Prime Minister Alexis Tsipras has called for a surprise referendum for July 5, the exact details to be worked out in an emergency parliamentary session Saturday (today). The Greek people will be asked to vote yea or nay on further austerity (of the sort required in order to remain in the Euro); so yes, this is essentially a referendum on Grexit. (A Greferendum, or maybe a Grief-erendum, as the case may be.)

Alexis Tsipras
The question is whether Greece can hold together, financially, politically, and otherwise, for a full 8 days. A lot can happen in 8 days. A lot will happen.

Greece needs daily Emergency Liquidity Assistance (of around a billion Euros a day) to keep its banks open. This is something ECB has been approving every week, until now; but if ELA is lifted, the banks would likely close. Suddenly. Bank holiday until further notice.

Tuesday is the deadline for making payments to IMF. Believe it or not, there is a possibility Greece will find the funds needed to make this payment (and one would have to believe Tsipras would not deliberately have called a referendum past the payment date without having a trick or two up his sleeve in this regard), so don't be surprised if June 30 arrives without default (or arrears) taking place. This may be the biggest surprise of the week.

If June 30 passes and the IMF payment is not made, chaos could ensue. It all depends how ECB reacts. They could suspend ELA, forcing a bank emergency. They could declare Greece to be in default (even if IMF doesn't). Note that IMF has 30 days after June 30 to declare default. IMF distinguishes between arrears and default (just as your bank does, with regard to your home mortgage).

Tsipras probably has enough tricks up his sleeve to make it to the July 5 referendum without a major accident. Otherwise he would surely have called the referendum weeks ago. He wouldn't be much of a politician if he hadn't planned this move quite thoroughly. (We'll see, of course.)

Nevertheless, the creditors will no doubt do their best (or worst) now to try to influence the referendum's outcome, using everything from propagandistic news-conference pronouncements to outright-hostile monetary tricks. They will probably think of various ways to throw tacks under the tires of SYRIZA. But such nastiness will only be seen by the Greek people as inappropriate interference, by foreigners, in the process of democracy.

Meanwhile, it remains to be seen if the Greek people can come to grips, finally, with the fact that remaining in the Euro means accepting truly crushing new austerity measures; measures that will leave Greece no better off than before (indeed, worse off). The Greeks (and people everywhere) need to come to grips, also, if they haven't already, with the fact that almost all of the Greek "bailout money" ends up right back in the pockets of the creditors. It's a classic payday-loan situation. New loans are being used to pay interest on old loans. This is exactly what's no longer sustainable.

The Greek people need to decide between two awful alternatives: suffer endlessly under the yoke of creditor-imposed austerity (which will only get worse with each new round of payday loans, which will go on forever, until the country collapses), or suffer the one-time pain of leaving the Euro (after which, there is at least the possibility of recovery). Many countries have suspended debt payments and lived to prosper another day. None, so far, has left the Euro. This time, just maybe, Greece will set an important precedent, by rejecting its never-ending vassal-nation status; by leaving the Euro.

Some observers have pointed out that technically, default doesn't automatically mean a Euro exit. As a practical matter, though, it almost certainly does mean exactly that. It depends whether the Greek government implements a system of IOUs, or rolls out the drachma. IOUs would not trigger Grexit, but under ECB rules, a separate currency would mean ECB can unilaterally force Greece out of the Euro. IOUs would come into play if Greece cannot otherwise meet its pension-payment needs. The drachma is nobody's first choice. It signifies Grexit, a painful series of devaluations, and inflation. (But physical Euros would still play an important role in the cash economy. Greece would become the new Montenegro, in this respect.)

Whichever way Greece goes, it will provide an important lesson in democracy. The United States only wishes it had a referendum process for deciding important questions. We only wish we had a democratic way of electing presidents by direct popular vote. (Instead, we have the incredibly baroque, outmoded Electoral College, which is not required to follow the popular vote and could, in theory, be bought off.)

The cynical way of looking at what Alexis Tsipras has done is to say that in "typical politician fashion," he has passed the buck to others (i.e., to the Greek people) to decide Greece's fate, rather than providing strong leadership himself. But really, isn't this exactly how democracy should work? Shouldn't the people (not politicians; not corporations; not lobbyists nor back-room meddlers) decide their own fate?

Thank you in advance, Greece, for a marvelous civics lesson. Millions of us, around the world, can't wait to see what happens next.