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Tsipras blinks

1 Jul 2015 By Hugo Dixon

It looks like Alexis Tsipras is crumbling.

After the banks closed and public opinion started moving against him, the Greek prime minister seems desperate for a deal with his creditors. Athens has now defaulted to the International Monetary Fund, adding to the pressure. But it is not clear lenders will cut him any slack. They may prefer to deal with his successor.

When Tsipras announced last week that Greece would hold a referendum on whether to accept a cash-for-reforms deal proposed by the euro zone and the International Monetary Fund, he said the proposals amounted to “possibly the humiliation of an entire people”.

The snag is that Tsipras did this when both the government and its banks were virtually out of cash. The European Central Bank refused to supply any more liquidity to banks. As a result, the banks were closed and on June 30 the government defaulted on a 1.5 billion euro payment due to the IMF.

The immediate reaction of many Greeks to Tsipras’ referendum idea was to stand up to the creditors and vote “No”. But, since capital controls were imposed with cash withdrawals limited to 60 euros a day, opinion has started to swing towards “Yes”. The euro zone countries also made clear that voting “No” would amount to quitting the euro, something most Greeks do not want.

Tsipras reacted by sending the euro zone bailout fund a new proposal on June 30. This pleaded for an extension to the bailout programme, as well as a restructuring of Athens’ debt. The euro zone immediately rejected the plan. The Finnish finance minister pointed out that it was too late to extend a programme. Angela Merkel, Germany’s chancellor, said there would be no new negotiations until after the July 5 referendum.

The Greeks then said they would submit a second paper outlining reforms they plan to conduct. The euro zone finance ministers said they would hold another teleconference on July 1 to take stock of the situation, but that doesn’t quite amount to reopening negotiations.

All this seems a polite way of telling Tsipras: “You are too late, buddy.”

One explanation for this line is that it takes time to negotiate a new agreement and then get parliamentary approval. The same old numbers cannot be used because Greece’s economic prospects have deteriorated as a result of the past few days of capital controls.

A solution could be to cancel the referendum, an idea floated by Greece’s deputy prime minister. But the creditors are so fed up with Tsipras that they are unlikely to make his life easy. They expect any negotiations to be slippery and doubt Tsipras’ radical left Syriza party would implement anything he agreed to. By contrast, the creditors may hope that the Greeks will now vote “Yes”, Tsipras will resign and a more constructive prime minister will take over.

Still, it would be wrong to think that a “Yes” vote would lead to a quick or straightforward solution, because of the complexities of Greek politics.

One might think that opposition parties and Syriza could form a national salvation government. Something similar happened in 2011. But creditors would have little confidence that any government relying on Syriza would do what it promised. As a result, it would struggle to reach a new deal with its lenders and get the banks open.

Knowing all this, the Greek political parties might conclude that it would be best to clear the air by calling new elections. But there’s no guarantee that the opposition would win such a vote because it is fragmented. It has not yet managed to rally behind a single figure and a common programme.

Even if the opposition won such an election, it would not be ready to start talks with its creditors until August. By then, the banks would have long run out of cash unless the ECB supplied more emergency liquidity, and the economy would be in a terrible state.

Benoit Coeure, the ECB executive director responsible for negotiations with Athens, said this week that if Greeks vote “Yes” in the referendum, he had “no doubt” euro zone authorities would find ways to meet commitments towards the country. The snag is that it may struggle to find a legal route to provide more liquidity until a new agreement is reached.

Hawks in the central bank are expected on July 1 to push for liquidity to be cut because of Athens’ default to the IMF, on the ground that the banks are heavily exposed to the government. But even if the ECB turns a blind eye to that, it can’t ignore the 3.5 billion euros of loans due to be repaid to the ECB itself on July 20.

Hopefully, Coeure’s reassuring prediction of how the euro zone will react if the Greeks vote “Yes” will prove correct. After all, even if the creditors are willing to let Tsipras hang out to dry, they shouldn’t take the same approach to the Greek people.





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