Greece's Metaxas Moment?
“There’s a dark night going on in Europe, a dark and foggy night where bad things come out of trees and bite you. It’s a pretty scary place.”
-- Michael Sabia (2013), CEO of the Caisse de dépôt et placement du Québec
Greece heads to a referendum on Sunday that could decide whether its future lies in or out of the eurozone, with its banks closed and capital controls in place after the European Central Bank decided not to further increase the emergency liquidity it supplies to local lenders.Not surprisingly, global markets slid lower on Monday. Reuters reports that European bank stocks and bonds are shaken by Greek turmoil:
The decision to impose the extended bank holiday was taken during a meeting of Greece’s financial stability council, which included Finance Minister Yanis Varoufakis and Bank of Greece Governor Yannis Stournaras.
The official announcement had not been made at the time of going to press but sources said that ATM withdrawals would be limited to 60 euros per day per account and that banks would remain closed for at least the next six working days, including the day after the referendum on the institutions’ proposals to Greece. Visitors to Greece will be able to withdraw cash up to the limit set by their bank.
The decision to shut down banks and bring in capital controls came less than 24 hours after Parliament voted in favor, by 178 votes to 120, of holding a referendum on Sunday. This, combined with the expiration of Greece’s bailout extension Tuesday, prompted the ECB governing council, which met Sunday, to decide not to raise the Emergency Liquidity Assistance ceiling beyond the level it reached on Friday.
This meant that banks would not have enough liquidity to support the spike in withdrawals prompted by Prime Minister Alexis Tsipras calling a referendum on Friday night. Around 1 billion euros was taken out of accounts on Saturday as Greeks queued at ATMs around the country. There were longer queues Sunday.
Tsipras blamed the country’s creditors for forcing Greece’s hand but said that this would not halt the plan to hold a referendum next Sunday.
“(Rejection) of the Greek government’s request for a short extension of the program was an unprecedented act by European standards, questioning the right of a sovereign people to decide,” Tsipras said in televised address to the nation Sunday.
“This decision led the ECB today to limit the liquidity available to Greek banks and forced the Greek central bank to suggest a bank holiday and restrictions on bank withdrawals.”
Tsipras also said he sent a new request for an extension of Greece’s bailout – which expires on June 30 – to leaders of eurozone countries and the heads of the European Central Bank, the European Commission, the EU parliament and the European Council.
“I am awaiting their immediate response to a fundamentally democratic request,” he said, adding that such a move could prompt the ECB to turn on the liquidity tap again.
“One thing is clear: the refusal of a short extension, and the attempt to nullify a democratic procedure is an act deeply offensive and shameful for the democratic traditions of Europe.”
Tsipras suggested that the lenders’ behavior would make Greeks more determined to vote against the bailout proposal put forward by lenders to the Greek government on Thursday. In his speech in Parliament on Saturday, the Greek prime minister suggested that a “no” vote would allow him to return to negotiations in a stronger position and able to ask for a better deal from the institutions.
Tsipras said bank deposits and wage and pension payments in Greece remained safe and appealed to Greeks to stay calm.
“Any difficulties that may arise must be dealt with with calmness,” said the premier. “The calmer we are, the sooner we will get out of this situation.”
New Democracy leader Antonis Samaras, who clashed with Tsipras in Parliament on Saturday, called on the prime minister to continue negotiations with the country’s lenders this week in the hope of finding a last-minute compromise. Samaras suggested that if Tsipras does not have enough support from his own party, he should create a national unity administration with the participation of opposition parties.
“Our country needs to remain in the heart of Europe and in the euro. Mr Tsipras must continue the negotiations,” Samaras said. “If he can’t do that by himself, he should attempt a big national consensus.”
Developments in Greece also drew the attention of the American government Sunday. US Treasury Secretary Jack Lew urged top European finance ministers and the International Monetary Fund to continue working together toward a “sustainable solution” to reforms in Greece and its recovery within the eurozone.
Lew spoke by phone with several top officials on Saturday, including the finance ministers of Germany and France, and IMF Managing Director Christine Lagarde, according to a readout of the call provided by the Treasury Department on Sunday.
In those calls, he said it was “important for all parties to continue to work to reach a solution, including a discussion of potential debt relief for Greece, in the run up to the July 5th referendum,” according to the readout, referring to a planned vote in Greece.
Lew also underscored the need for Greece to adopt “difficult measures to reach a pragmatic compromise with its creditors,” the Treasury statement said.
The Treasury spokesperson said senior department officials have also been in regulator communication with Greece and that Lew had spoken to Prime Minister Alexis Tsipras “multiple times” over the past two weeks.
The department has urged Greece to work closely with its international partners on planning for a bank holiday and capital controls, the spokesperson said.
President Barack Obama spoke with German Chancellor Angela Merkel on Sunday about the Greek situation.
“The two leaders agreed that it was critically important to make every effort to return to a path that will allow Greece to resume reforms and growth within the eurozone,” a White House statement said.
“The leaders affirmed that their respective economic teams are carefully monitoring the situation and will remain in close touch.”
Europe's financial markets were jolted on Monday by the collapse of talks and imposition of capital controls in Greece, although initial heavy selling eased as investors judged there was still some way to run for the saga.Beware of market strategists telling you that "Grexit can be contained." This is pure rubbish and wishful thinking. There's a reason why Francois Hollande and Angela Merkel are urging Greeks to vote "yes" on Sunday, they're petrified of the ramifications of a Grexit.
Banks and bond market borrowing costs for Italy, Spain and Portugal bore the brunt of markets' fright that Prime Minister Alexis Tsipras' calling of a referendum on further austerity demanded by euro zone creditors would see Greece leave the euro.
After an initial wave of selling, however, most markets recovered some ground. The one-day moves were large but looked pale in comparison to the events of 2008 or the last major round of Greek-spurred turmoil in 2011-12.
Wall Street was set to open around 1 percent lower while the FTSE Eurofirst blue chip index was down by just over 2 percent overall.
"The European financial system now has much less exposure to Greece than in 2011 and 2012," said Stephanie Flanders, Chief Market Strategist for Europe at JP Morgan Asset Management.
"It is also better equipped to deal with contagion to other countries -- and so are the countries themselves."
Greece's banks and stock market were closed on Monday and were expected to remain so until after the July 5 snap referendum called by Greek Prime Minister Alexis Tsipras on austerity demanded by euro zone partners.
What are my thoughts on all this? I've written extensively on a Greek suicide, the endgame for Greece and Europe and managing a Greek default. I warned you to prepare for Graccident, knowing full well that SYRIZA's leaders weren't going to blink first and that all hell would break loose if there was no deal for Greece.
Faced with political suicide, Greek Prime Minister Alexis Tsipras decided to abdicate his responsibilities to the country and called a referendum on the proposals. He's playing this referendum as Greece's Metaxas moment (borrowed this term from a friend of mine; h/t Dimitri) in a pathetic attempt to appeal to nationalism and stand up to the "blackmail" of creditors.
But the timing of this referendum is highly specious and I agree with those who think it's more of a con than about democracy. Moreover, Hugo Dixon of Reuters is right, as Tsipras gambles Greece, it could backfire on him and his party:
This, indeed, is one of the problems with Tsipras’ move. Even if the people say they want the creditors’ proposals, it is not clear these will still be on the table in a week because the euro zone’s bailout programme will have expired.Nobody really wants Grexit except the way SYRIZA's leftist lunatics are acting, I'm beginning to wonder if this was their goal all along. One might also wonder if Merkel, Schaeuble and other leaders of creditor nations are also looking for Grexit.
In theory, a totally new programme could be created. But, in practice, it will be impossible to persuade creditor countries such as Germany to approve such a deal if Tsipras is still in power. It is hard to see how Athens could avoid defaulting on some bonds owned by the ECB itself on July 20.
Although Tsipras has vowed to respect the decision of the people, he will struggle to hang onto power if they vote against him. But that won’t make things a lot easier because no other combination of parties can form an alternative government.
It is likely therefore that there would be new elections. It is possible that this could lead to a national unity government that then reached terms with the creditors. But the ensuing havoc would have damaged the economy further. What’s more, with the opposition in disarray, there’s no guarantee that even new elections would end the political paralysis.
On the other hand, if the people backed Tsipras, it is hard to see any outcome other than Greece quitting the euro. Some might hope that the creditors would then back down. But it seems more likely they would harden their line.
With the banks in meltdown, Tsipras might try to avoid the inevitable by issuing IOUs to pay his bills. But this is unlikely to do more than postpone the time before Greece returned to the drachma or whatever it would call its new currency.
In theory, default and the launch of a new currency could give Greece a new lease of life after a sharp shock, provided Tsipras then pursued a responsible fiscal and monetary policy. But this doesn’t seem likely. Tsipras and his colleagues in the radical left Syriza party would be more likely to use their renewed control of monetary policy to print money. The new currency would then devalue massively, leading to rising inflation. There would also be such dislocation that unemployment and poverty would increase.
Foreigners might also initially be deterred from visiting the country. That would be a blow to Greece’s most important industry, tourism.
Meanwhile, the euro zone is facing the most testing time in its troubled history. The ECB’s so-called quantitative easing programme, which involves buying masses of bonds issued by euro zone governments, will probably keep things under control.
But if Greece leaves the euro, there would be a nagging question over whether other countries in trouble might in the future quit too. In some circumstances, such doubts could become self-fulfilling.
Beyond the economic repercussions, a so-called Grexit would unleash vitriolic recriminations. These could poison intra-European relations for years to come.
This is what happens when two sides practice the politics of brinkmanship. This Greek "crisis" could have been settled a few years ago by providing Greece meaningful debt relief in exchange for huge job cuts to the Greek public sector. The Troika should have written off 30%-50% of Greece's debt and provide concurrent investment projects but imposed draconian cuts to the public sector and a 1% primary surplus every year.
Instead, the Troika in its infinite wisdom imposed asinine measures which slowly but surely ensured a Greek depression as the Greek private sector bore the brunt of these harsh austerity measures. Greeks revolted by voting in SYRIZA and now we're at the brink of a Greek disaster and possibly something much, much worse.
Even now, as the Greek economy plunges into the abyss, job losses in the private sector will soar. Some analysts in Greece think the 1.3 million unemployed will reach 2 million unemployed but don't worry, nobody in the Greek public sector will lose their job. At least not yet, once the crisis reaches epic proportions and there is no money to pay them, there will draconian cuts in the public sector too.
This is what Greeks don't understand. Unlike what Paul Krugman thinks, leaving the eurozone will plunge the Greek economy back to 1975. Dimitrios Giokas outlined 12 devastating consequences if Greece returns to the drachma:
- Rapid devaluation of the drachma against other currencies (the rate might surpass 1,000 ΔΡΧ/1€). An attempt to tie the drachma to the euro and lock the conversion rate is doomed to fail (as it failed in the case of Argentina), because of the huge capital flight and depletion of foreign exchange reserves.
- The devaluation will lead to skyrocketing inflation at levels equal and greater than 40 percent, further limiting thereby the purchasing power of citizens.
- Capital flight and a sharp increase in non-performing loans will be the coup de grace for the weak country's financial system, which would collapse, "drying" the real economy.
- In such an eventuality the wage and pension freeze payment will be inevitable for a while until the partial restoration of liquidity. The consequences from social unrest that will likely follow are unpredictable.
- Gross domestic product will likely shrink to about 2/3 of the current level.
- The public debt of Greece, totaling 322 billion euros, will increase automatically depending on the amount of the depreciation of the drachma, multiplying our borrowings.
- Even if, after bankruptcy, a partial debt restructuring follows, it will not be painless. It will be accompanied by a new rescue package (only from the IMF now) and very burdensome fiscal adjustment measures.
- There will be an equal increase of private debt through the skyrocketing of lending and depositing rates in an effort to control inflation. Higher interest rates will also make it difficult for businesses to raise capital.
- Suffocation of import business due to a weakened market, the devaluation of the drachma and the obvious lack of credit.
- Failure of imports will bring shortage of essential items on the market since, as we know, Greece is not self-sufficient in raw materials and meets its needs (eg. wheat, milk, meat) by imports from foreign countries.
- Invasion of predatory foreign investors, who will acquire companies, property, and public property at derisory prices. It will lead to a sellout of the country, now claimed by the proponents of the drachma.
- Diplomatic and economic isolation of Greece, who, being in a very difficult situation, will not be able to follow geopolitical developments in the region, as well as any challenges by its neighbors.
But the way SYRIZA is phrasing the question of the referendum is very misleading because most Greeks don't want the harsh austerity measures creditors are imposing on their country and some think by voting "no", it will force creditors to ease up.
This could prove to be a disastrous miscalculation. True, the creditors are absolutely dumb in their demands but a "no" vote will be a total disaster for Greece and the eurozone. Keep in mind, there are many extreme left-wing and right-wing imbeciles in Greece who don't care and think they're better off without the eurozone. But even some in the center think they can force better terms by rejecting these proposals and that scares me.
So what happens now? I'm hoping that as Greeks get a taste of what communism is all about -- namely, long lineups at ATMs and gas stations and food shortages at supermarkets -- they will come to their senses and vote a resounding "yes" in the referendum on Sunday.
If they vote "yes", Tsipras and company will be forced to resign and call an election. This is what the creditors want. They want to kill SYRIZA once and for all and they might achieve this goal. A lot of Greeks are fed up with SYRIZA too and they want them out.
And what if it's a "no" vote? This might buy SYRIZA some time but when the country plunges into the abyss and has no money to pay pensioners and public sector workers on July 15th, Greeks will hang Tsipras, Varoufakis and other members of SYRIZA, quite literally.
Either way, yes or no, I truly believe Tsipras and SYRIZA are cooked. Of course, I worry more about the second scenario as a "no" vote will set Greece back to the 1940s and possibly trigger a liquidity time bomb in Europe and the rest of the world.
That is something Tsipras and company are hoping for. They want a global financial crisis to spread so they can make their case for a new deal for Greece. But this is a dumb strategy too because if the world is thrown into a crisis, Greeks will be even more isolated.
As far as the creditors are concerned, they need to take responsibility for this latest tragic turn of events too. As they wage ideological warfare on SYRIZA and other leftist parties in the eurozone, they risk fanning the flames of radicalism in Europe, and that will come back to haunt the continent.
As far as the Greek stock market, it's closed for a week. Some investors are speculating on the National Bank of Greece (NBG) and the FTSE Greece ETF (GREK) on the NYSE but I would steer clear of both as the risk of nationalization has just increased considerably. There are plenty of nervous investors watching events in Greece, including Canada's Warren Buffett and frantic hedge fund managers that made big bets on Greece.
Who else is nervous? PSP Investments which bought a big stake in Athens' airport and other large investors with big stakes in Greece. The events of the last few days has made everyone very nervous as SYRIZA's leaders are showing they're willing to nationalize everything in their twisted and perverted version of democracy.
On a personal note, it pains me to see what is going on right now in Greece. Old men and women waiting at the doorsteps of banks to see if they can get their pensions. One old lady passed out waiting in a huge lineup at an ATM as she tried to get money to pay for her doctor's visit. 60 euros a day is nothing, it's a joke in Greece, especially in Athens.
I hope Greeks see all this and vent their rage against Tsipras, Varoufakis and the rest of the clowns governing the country right now. I hope they vote "yes" to the eurozone and vote these bums out. Greece needs a new deal, one based on market principles and the primacy of the private sector over the public sector. Mindless austerity is insanity but so is expanding the bloated an inefficient public sector at all cost even when the country is faced with ruin.
And if you're thinking of visiting Greece this summer, bring lots of cash, get ready for aggravation and read the views from a friend of mine in Mykonos now:
"I’m in Mykonos at the moment. Last night, after they announced the measures for the next week, I went to withdraw money from ATMs; 5 in the main city (Chora) were out of service. I found one that still had cash. I withdraw up to my daily limit. It was getting busy by the time I left.
Ironic comments flew about situation and references to Argentina rose; a lady was told not to go to ATM alone from now on...
This morning, pensioners we’re lining up at banks to get money. Unlucky.Below, Greece's government is under pressure after a shock decision to hold a referendum hit markets and closed banks. Reuters Ciara Lee looks at how likely a Greek exit from the euro zone is now.
Today, at lunch, our foreign credit card was declined by restaurant. They offered us to pay cash or to drive us to an ATM since foreign cards are not limited on withdrawals.
Seems though that we’re disconnected from the rest of the country here. Greeks from abroad can’t believe where the situation has gotten to. Local Greeks are generally calm given the circumstances.
Back in Athens tomorrow. Will update you."
And CNN talks to New York University Professor Nicholas Economides about the Greek debt crisis. Listen carefully to his comments, he understands what is at stake now that no deal is signed and the country's banks are on the verge of collapse.
The next few days have the potential to transform Greece and Europe. What remains to be seen is if this transformation will be for the better or worse. Will the Greek debt crisis be the Iraq War of finance or will there be a real awakening among Europe's leaders and an attempt to deal with huge inequities between eurozone's northern and southern members?
I remain very skeptical and fear eurozone's deflation crisis will get worse until these structural issues are finally dealt with, one way or another. Let's hope it's a peaceful resolution which takes everyone's best interests into consideration.