Monday, July 6, 2015

Return To Ithaca?

Lefteris Papadimas and Renee Maltezou of Reuters report, Greece forces Europe to choose between political unity or economic dysfunction:
European leaders, stunned by the Greek referendum result, have called a summit for Tuesday, Europe time, to discuss their next move.

The shock 'no' vote left Greece in uncharted waters: risking a banking collapse that could force it out of the euro.

Without more emergency funding from the European Central Bank, Greece's banks could run out of cash within days after a week of rising desperation as banks shut and cash machines ran dry. That might force the government to issue another currency to pay pensions and wages.

For millions of Greeks the outcome was an angry message to creditors that Greece can no longer accept repeated rounds of austerity that, in five years, had left one in four without a job and shrank the economy by a quarter.

Officials from the Greek government, which had argued that a 'No' vote would strengthen its hand to secure a better deal from international creditors after months of wrangling, immediately said they would try to restart talks with European partners.

But eurozone officials shot down any prospect of a quick resumption of talks, even though finance ministers were planning to meet during the week to discuss the fallout from the vote. German Chancellor Angela Merkel and French President Francois Hollande immediately scheduled a bilateral meeting.

"Tsipras and his government are leading the Greek people on a path of bitter abandonment and hopelessness," Germany's Economy Minister Sigmar Gabriel told the Tagesspiegel daily. He said negotiations with Athens now were "barely conceivable".

Foreign Minister Linas Linkevicius of Lithuania, which joined the euro zone at the start of the year, said on Twitter: "Difficult to help Greece against the will of people & Government which lives in parallel World."

With Greece facing its worst financial crisis in recent memory, Tsipras said Athens was returning to the negotiating table with the express goal of reopening banks which have been shut for over a week with the imposition of capital controls.

The ECB is likely to maintain emergency funding for Greek banks at their current restricted level and avoid the drastic measure of yanking support, people familiar with the matter said.

Even then, the banks are expected to struggle as Greeks besiege cash machines to withdraw a maximum of €60 ($66) daily, though government officials have vociferously denied any plans to issue a parallel currency. Fears have grown of a shortage of petrol and medicine if the cash squeeze continues.

"After the 'big no' it is now a race between two forces: political pressure for a deal, versus the impact of banking dysfunction within Greece," JP Morgan said in a research note. "Although the situation is fluid, at this point a Greek exit from the euro appears more likely than not."

The referendum call by Tsipras eight days ago came after months of fruitless negotiations with European and International Monetary Fund creditors since the radical leftist government took power in January. That follows seven years of deep economic crisis that has stoked violent protests and driven youth jobless rates to nearly 50 percent.

Unable to borrow money on capital markets, Greece has one of the world's highest levels of public debt. The IMF warned last week that it would need massive debt relief and €50 billion ($55 billion) in fresh funds.

Opinion polls over the months have shown a large majority of Greeks want to remain in the euro. But many appear to have shrugged off the warnings of disaster, trusting that a deal can still be reached without the tax hikes and pension reform demanded by lenders and rejected by Tsipras.

"I have been jobless for nearly four years and was telling myself to be patient," said 43-year-old Eleni Deligainni, who said she voted 'No'. "But we've had enough deprivation and unemployment."
Larry Elliott of the Guardian also reports, Greece's vote edges it towards euro exit, but the odyssey is far from over:
Greece’s membership of the euro hangs by a gossamer thread after the victory for the no side in the country’s referendum. The cash machines are running out of money and the economy is in freefall.

The fate of the home of democracy is not in its own hands. If it chooses to do so, the European Central Bank could force Athens to default on its debts and issue its own currency on Monday morning by withdrawing emergency support for the Greek banking system.

That looks unlikely. The ECB has so far avoided taking overtly political decisions during this crisis, so it will avoid pulling the plug while talks are still going on between Greece and its creditors, and Athens wants talks to resume immediately.

There are, though, a number of ways events could play out. Almost every European leader of note sought last week to put the frighteners on the Greek people, warning them that a victory for “no” meant leaving the single currency. Angela Merkel, François Hollande, Matteo Renzi and the rest now have to put up or shut up.

More than likely they will shut up, at least for now. Emergency assistance for Greece will continue while the troika of the European commission, the ECB and the International Monetary Fund sees how events in Greece unfold. Despite the decisive result, Greece’s eurozone partners will not offer notably softer terms than those that were on the table when Tsipras walked out of negotiations just over a week ago. Merkel, for one, would be in serious political trouble if she did.

The temptation for the creditors could be to let the Greeks sweat a bit, to see if a couple of weeks of a cashless economy can do what the referendum could not: effect regime change. Tsipras would be under pressure to resign and call fresh elections if the economic news worsens, and that might result in the election of a government more amenable to the rest of Europe.

But playing it long is risky. Greece might be forced out of the euro before Tsipras gets round to resigning, so desperate is its economic plight. What the creditors should do is to respect the result of the referendum, realise that they have to give Greece something in order to prevent the crisis escalating out of control, and recognise that debt relief must be an explicit part of a funding package that will see the eurozone’s weakest member through the next couple of years. Put simply, they should try a bit less stick and a bit more carrot.

Whether they will do so remains to be seen. Indeed, the relentless mishandling of Greece ever since the crisis first flared up in 2010 suggests that blunder will follow blunder. It doesn’t help that relations between Greece and the other 18 members of the eurozone are now so sour. The chances of Greece leaving the euro by mistake, just as Lehman Brothers went bust by mistake in 2008, are reasonably high.

All options currently remain open. Greece could do what Cyprus did: default on some of its debts while staying in the euro. Tsipras could decide to accept the tax increases and the pension cuts demanded by the creditors while receiving only minor and vague concessions on debt relief. Greece could have run out of money and be out of the euro within 24 hours.

Some things though are clear. Firstly, the Greeks have said no to austerity rather than to membership of the euro. Tsipras does not have a mandate to bring back the drachma, even if that is where this all ends.

Secondly, the referendum result means both economic and political chaos. As Joan Hoey of the Economist Intelligence Unit put it even before the vote: “Greece is angry and fearful; divided and conflicted.”

Inevitably, Greece faces a fresh period of acute economic pain. It will take months, if not years, to recover from the events of the past week, even if there is a speedy resolution to the crisis. The Greek economy has already shrunk by a quarter in the past five years.

Thirdly, it is no longer possible to kick the can down the road. Any solution to the Greek crisis that involves more austerity without measures designed to get the economy growing again and to make the country’s debt sustainable will be a pyrrhic victory. The upshot would be a period of feeble growth and mounting indebtedness that would bring the possibility of Grexit back on the agenda. Sooner rather than later, in all likelihood.

Fourthly, this is the most serious crisis in the euro’s relatively short history. There have been confident pronouncements that Greece has been quarantined so that there will be no knock-on effects on the rest of the eurozone. Such sentiments will be tested to the full if there is a Grexit. Share prices will inevitably take a tumble when the financial markets open for business, but more attention should be paid to the bond yields – or interest rates – on the sovereign debt of other eurozone members seen as vulnerable.

The short-term problem for Merkel and Hollande is obvious. If they take a tough line in talks with Athens, they will get the blame for Greece’s departure from the single currency.

The longer-term problem is perhaps even more serious. Greece has highlighted the structural weaknesses of the euro, a one-size-fits-all approach that doesn’t suit such a diverse set of countries. One solution would be to create a fiscal union to run alongside monetary union, with one eurozone finance minister deciding tax and spending decisions for all 19 nations. This, though, requires the sort of solidarity notable by its absence in recent weeks. The European project has stalled.

So, this story is not over. In Homer’s epic tale, it took Odysseus 10 years to return to his Ithaca home from the Trojan war, losing all his men along the way. Greece’s modern odyssey, similarly, is only half over. The next chapter begins on Monday.
The next chapter has indeed already begun. On Monday, Greek Finance Minister Yanis Varoufakis announced his resignation on his blog, stating the following:
Soon after the announcement of the referendum results, I was made aware of a certain preference by some Eurogroup participants, and assorted ‘partners’, for my… ‘absence’ from its meetings; an idea that the Prime Minister judged to be potentially helpful to him in reaching an agreement. For this reason I am leaving the Ministry of Finance today.

I consider it my duty to help Alexis Tsipras exploit, as he sees fit, the capital that the Greek people granted us through yesterday’s referendum.

And I shall wear the creditors’ loathing with pride.

We of the Left know how to act collectively with no care for the privileges of office. I shall support fully Prime Minister Tsipras, the new Minister of Finance, and our government.

The superhuman effort to honour the brave people of Greece, and the famous OXI (NO) that they granted to democrats the world over, is just beginning.
It seems that Varoufakis's strategy all along was to resign either way the vote swung. He lost all credibility with his counterparts but by resigning now, he can claim victory and let someone else clean up the huge mess he created and sign a deal he clearly doesn't want his name on.

Some think it's easier to strike a deal now that Varoufakis is gone. Unfortunately, the man who will replace him, Oxford-educated Euclid Tsakalotos, is more of a hardliner than Varoufakis and it's unclear how negotiations will go with him at the helm of the finance ministry. However, he is pro-European and more palatable to creditors looking for a compromise after the bailout referendum.

So what happens now? The referendum is over and after a landslide 'No' vote where 61% of voters rejected the bailout offer, reality has set in. Greece needs a deal and fast.  Every day that banks remain closed costs the Greek economy hundreds of millions of euros and brings the country that much closer to total economic collapse.

Hugo Dixon of Reuters reports, Greece will struggle to stay in euro:
The question Greeks answered on Sunday’s referendum ballot paper didn’t mention the euro. But after the people gave an emphatic “No” to proposals from the country’s creditors, Greece will struggle to stay in the single currency. Even if it does, all routes will bring economic hardship and social tension.

The first way of avoiding a reversion to Greece’s pre-euro currency would be if euro zone partners and the International Monetary Fund cut Alexis Tsipras a significantly better deal than they were offering 10 days ago. This is what the radical left prime minister said would result from a “No” vote. The government even promised to do a deal within 48 hours.

But the creditors probably won’t buckle. They would prefer to keep Greece in the euro if possible – for both financial and geopolitical reasons. But many of the leaders are fed up with Athens’ rhetoric and negotiating style. The day before the referendum, for example, Finance Minister Yanis Varoufakis accused them of terrorism. Parliamentarians and electorates in some countries, such as Germany, are hostile to the idea of granting more soft loans to Greece.

The euro zone countries seem to have steeled themselves to the likelihood of a “Grexit” since talks broke down. Since then, despite the fact that Greece has closed its banks, financial contagion has been minimal. Several countries such as Spain will be nervous that, if they now cut Athens a soft deal, radical parties in their own countries will grow in strength.

What’s more, since Tsipras called his referendum, the country’s old bailout programme has expired and the country’s economic prospects have deteriorated. A comprehensive new deal for Greece would probably require around 70 billion euros. It is hard to see why the creditors would lend such a large sum of money to a government they don’t trust.

This doesn’t mean that the euro zone will refuse to talk to Greece. But they are likely to take a measured approach rather than snapping to attention. They probably won’t rush to provide debt relief, one of Tsipras’ key demands. They will also attach lots of conditions to any money they lend and insist on intrusive monitoring. Meanwhile, the European Central Bank seems unlikely to increase the amount of liquidity it is providing to Greece’s banks.

All this will be frustrating for Tsipras. Not only is the bank closure already hitting society and the economy, the cash machines could run out in days.

What’s more, things will take an even more dramatic turn for the worse on July 20, when Athens is due to pay the ECB 3.5 billion euros. If Greece misses that payment, the central bank will probably conclude that the state is bust and, because of the way the country’s banks are connected to the government, that they are insolvent too.

A bust bank is a more serious matter than a bank holiday. People would be unable to use their credit cards or make electronic transfers. Tourists, who are currently unaffected by the capital controls, would no longer be able to extract cash. That would hardly be a good advertisement for Greece’s most important industry. The economy would go into a tailspin.

Before the banks could be reopened, they would need to be recapitalised. One way to do this would be for Greece to leave the euro. The government could then print drachmas and invest those in the banks. The other option would be to “bail in” depositors – taking a portion of their savings and converting them into capital.

Since Tsipras has promised to do neither, he would be in a terrible bind. Indeed, it is possible that the strains on his government would become so great that it would fall. His majority is fairly slim, so there wouldn’t need to be that many defectors before he lost a vote of confidence.

That said, given the fat margin in the referendum, Tsipras looks secure for the moment. He might therefore be tempted to introduce a new currency, either to replace the euro or to run alongside it. Not only would this enable him to reopen the banks, it would also allow him to pay out salaries and pensions. The new currency would immediately fall to a big discount to the euro, perhaps half its value.

Were Tsipras determined to do this, his euro zone creditors might be willing to discuss a “velvet divorce”. This would involve giving Greece some transitional aid to reduce the most severe humanitarian hardship while allowing the country to stay in the European Union.

But the process of getting there will not be easy. Not only would it be a legal quagmire; it is not clear that the Greek people would let Tsipras bring back the drachma. The pro-European opposition would argue that he did not have a mandate to do so, as he has insisted that Sunday’s referendum was not about the euro.

Tsipras might also need a 60 percent majority in parliament, which he doesn’t have, to change the country’s currency, although the constitution isn’t absolutely clear on this point. If he insisted on going ahead, it is also possible that the country’s president would resign. In that scenario, there would probably have to be new elections – and, depending on what had happened in the intervening period, Tsipras might lose. If so, Greece might still hang on in the euro by its fingertips.

If this all sounds like a lot of “coulds” and “mights”, it’s because after the people’s “No” vote, Greece is sailing in uncharted waters. What is certain is that there is much more misery ahead.
No doubt, there is much more misery ahead. The plight of Greek pensioners and all Greeks won't magically disappear because of a "No" vote. It will only get worse. Varoufakis stated in a BBC interview "maybe things have to get far worse before they get better". He's now gloating the "NO vote is a majestic, big YES to a democratic, rational Europe!' but won't be around to clean up the mess when it hits the fan.

On another level, Greece may have just taught capitalists a lesson on what capitalism really means but it will come at a prohibitive cost:
Greece is now most likely an international pariah on the debt markets. It may have to start printing its own devalued drachma currency. It will have no access to credit. Sure, olive oil, feta, and raki will suddenly become incredibly cheap commodities on the export markets. Tourism in Greece is about to become awesome. But mostly it will be awful. Unemployment will increase as Greece's economy implodes. 
But the awfulness will be Greece's alone. Greece is now on its own path. It is deciding its own fate.
There is something admirable about that.
However 'admirable' some think democracy is, in this case there was no real democracy. Greeks still don't understand the consequences of their decision. Either that or they too are delusional and foolish like the leaders they elected to get them out of their debt woes. They don't realize that Greece has been taken hostage by a government disguising its incompetence as heroism.

Greeks talk a lot about how this "No vote" will restore their "αξιοπρέπεια" (dignity). That remains to be seen. As the country slips closer to an economic Armageddon, there will be no dignity in choosing a path to pauperism. At one point, Greeks will realize that real αξιοπρέπεια comes when they collectively accept responsibility for their economic mess and take difficult decisions to rectify it.

As far as creditors are concerned, they too have difficult decisions to make in the days ahead. Do they cut Greece off and make an example of her or do they sit down and offer her meaningful debt relief and investment projects in exchange for deep cuts in the Greek public sector? Hiking taxes and cutting pensions isn't a long-term strategy; it's implementing the same asinine austerity measures that have hitherto failed because they have disproportionately hurt the Greek private sector, leaving the bloated public sector largely intact.

Varoufakis was right to condemn "extend and pretend" but like all his predecessors, he lacked the courage to make deep and much needed cuts to Greece's bloated and inefficient public sector. God forbid he "cuts off the hand" that feeds him, his party and its bankrupt ideology.

Lastly, the referendum claimed its first victim after the results were announced. New Democracy and conservative opposition leader Antonis Samaras resigned. It's about time. Greeks don't like him and he failed miserably to convince them why they should ignore the propaganda and vote "Yes" for a better future. 

Who will take over from Samaras? I hope it's Dora Bakoyannis or her younger brother, Kyriakos Mitsotakis. Both understand what's at stake every day banks remain closed.

Below, as European Parliament members discuss humanitarian aid to Greece, CNBC takes a closer look at what austerity and capital controls mean for a single mother of four who is trying to get by with 1000 euros a month.

Can SYRIZA's leaders and creditors sit down and negotiate a better deal for her and her kids? I certainly hope so but strongly doubt it. Sadly, the return to Ithaca will claim many more victims before Greece's modern odyssey comes to an end. Exactly what that end is remains to be seen.

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