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Give Tsipras time

3 February 2015 By Hugo Dixon

There are two schools of thought about how the euro zone should play its negotiations with Alexis Tsipras, the new Greek prime minister. One is that other leaders and the European Central Bank should back him into a corner. The other is that they should give the radical left Syriza leader time.

The latter is the better option, particularly since Tsipras is already moderating his hard line. Not only would delay minimise the chance that Greece ultimately quits the single currency. It would cut the risk of a financial and political backlash in the rest of the euro zone in the event that Athens does leave.

This is not the same as saying the euro zone should cave in on the substance of what is at stake. While it should give Greece debt relief – especially as Syriza has now abandoned its demand to write down the nominal value of its borrowings by 50 percent – it should only do this if Tsipras commits himself to further reforms.

The euro zone could easily bring things to a head at the end of the month when Greece’s current bailout programme ends. The ECB could then refuse to act as a lender of last resort to the country’s banks. That would provoke an acceleration of deposit flight, forcing the government to impose capital controls.

Advocates of a hard line say it will bring Tsipras to heel. But toughness might not have the desired effect. Tsipras would be able to argue that the rest of the euro zone had ganged up on a newly elected government. Rather than backing down, he might stoke up nationalistic fever.

The new Greek government does not wish to leave the euro, fearing exit could lead to years of political strife and economic chaos. But if his pride was affronted, Tsipras might be emboldened to call a referendum on taking Greece out of the euro. And he might win it.

Grexit wouldn’t be good for the rest of Europe. Greece, which is already snuggling up to the Kremlin, might fall into Russia’s sphere of influence – something narrowly avoided at the end of World War Two.

Manifestly unfair treatment of the Greeks would also play into the hands of populists and eurosceptics in other countries. They could attack the European Union as brutal and undemocratic. Other euro countries might be destabilised as investors speculated that they, too, might be driven out of the single currency.

But the outcome could be very different if the euro zone gives Tsipras time. A delay will not remove the pressure, because the government will go bust relatively soon unless it can borrow more cash. The bonds owned by the ECB need to be repaid from the end of June.

Syriza says it only wants to borrow another 1.9 billion euros as the state is already overindebted. It plans to repay the ECB with new perpetual bonds, which pay interest but never repay the principal. This demand is unrealistic, as the central bank probably couldn’t agree to it without flouting EU law. So ultimately Athens will need more than 1.9 billion euros or it will go bust. And there are only two realistic sources of new cash.

One is the 7 billion euros left in the current bailout programme. But Tsipras will only get this if he cuts a deal with the euro zone. The other option is to issue bonds in the market. But Greece’s finances are so ropey that it won’t be able to do that unless the euro zone grants it a backup credit line – and it won’t do that unless Tsipras comes to terms.

So the euro zone holds the trump cards. But that doesn’t mean it should play them now. In particular, the ECB should not cut off liquidity to Greek banks at the end of February.

Tsipras should, of course, be strongly encouraged to ask for an extension of the current bailout programme while he is negotiating a new deal. That would do a lot to calm depositors. But even if he refuses to, the ECB should still authorise what is known as emergency liquidity assistance (ELA).

ELA would not be able to keep Greek banks afloat for long if they were faced with a proper bank run. In that case, lenders could not supply the required collateral. But ELA support may be enough to bridge the next few months.

The other euro zone leaders should give Athens that time. Doing so will increase the chance that Tsipras negotiates sensibly. He will be reluctant to take things to the brink and beyond if he’s not confident of having the Greek people behind him.

Despite the new emollient line, the Syriza leader may still overplay his hand. Decisions to hike the minimum wage by 28 percent, cancel privatisation plans and hire back redundant civil servants are already quite provocative.

Capital controls might still need to be imposed if there is a bank run and the collateral needed for ELA dries up. But, in such circumstances, the Greek people might force Tsipras to change his mind – or find a way of kicking him out of office if he refuses to.

What’s more, if Greece did eventually leave the euro, delay would reduce the political backlash elsewhere. After months of fruitless negotiations, it would be easier to paint Tsipras as a delinquent leader who had thrown away his country’s chance for recovery. There would also be less risk of financial contagion, as it would be possible to argue that Greece really was an exception.


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