The Greek choice: Change government or currency

By Pierre Briancon

Actions Sunday by the European Central Bank and the Greek government, though not irreversible, are the initial steps toward Grexit.

The predictable decision midday Sunday by the European Central Bank to freeze its emergency liquidity assistance to Greek banks triggered a chain of events that by Sunday night had made things relatively clear. Either Greece changes its government, or it changes its currency.
The ECB’s refusal to increase the €89 billion liquidity lifeline already extended to Greek lenders did amount to the first possible step towards a euro exit. And the decision to force a bank holiday and impose capital controls, taken later in the day by the Greek government and the country’s central bank, was a logical consequence — and a conceivable second step on the way to Grexit.

Yet none of those steps are theoretically irreversible, and European authorities took pains to remind the Greek populace throughout the weekend that a walk back remained possible.
But the inflamed rhetoric of Prime Minister Alexis Tsipras since his controversial and surprising decision to break off negotiations with creditors seem to put the possibility of a compromise deal close to nil.
And Tsipras showed no signs of changing his tactics on Sunday. In a statement Sunday night, Tsipras called the decision of eurozone finance ministers not to extend the country’s bailout from June 30 to July 5, when the vote on bailout terms is scheduled, and the ECB’s decision on the liquidity program amounted to “an attempt to blackmail the will of the Greek people.”

European authorities reminded Greeks that a walk back remained possible. Tsipras shows no signs to change tactics.

True to his long-standing policy of trying to raise  the differences between Greece and its creditors’ experts or ministers to the level of country leaders, Tsipras said that he had sent another request to his peers to extend the bailout by that crucial week. He also tried to reassure the Greek people, who will find their banks closed until July 7 as of Monday, that “their deposits are entirely secure.”
That, however, will depend on events Tsipras has little if any control over.
The decision of Tsipras to submit proposals he qualified as an “unacceptable ultimatum” to voters made it almost certain that Athens will default on €1.6 billion due the IMF on Tuesday. That means Athens will find itself without any source of funding after its current bailout, which was already extended by four months at the end of February, expires the same day. The prospect of an insolvent Greek government in turn raises the possibility that the country’s banks might meet the same fate, since a big chunk of their assets is  held in Greek government bonds.

• Th ECB could have ended ELA altogether. It chose instead a temporary solution, while indicating it would collaborate with the Greek national central bank on the capital controls needed to stem a predicted panic of depositors.

The government opted for a rather harsh version of capital controls, with transfers abroad banned and withdrawals limited to €60 a day. But they will only apply to the remaining holders of the €130 billion-odd worth of deposits remaining in Greek banks, well after those who had the means and expertise to shift their holdings abroad already did so. As such, they are bound to provoke a political backlash, which Tsipras has been trying to preempt by blaming the ECB for the country’s upcoming banking problems.

The government opted for a rather harsh version of capital controls, banning transfers and limited withdrawals to €60 a day.

The European Union will have to formally approve the capital controls proposed by Athens in the first hours of Monday. Such measures have already been used, once, in the eurozone when Cyprus requested a bailout in 2013. But the analogy stops there: capital controls in Cyprus were part of the country’s recovery program, and they were decided in consensus with the ECB, the International Monetary Fund and other creditor governments.
The main problem of capital controls — theoretically inconceivable in a monetary union — is how to get out of the system. Greek government officials seem to think the measure can be lifted once the country has voted, whatever the outcome of the referendum. But in all possible scenarios, it will come at a heavy price.
Should Syriza “win,” and the creditors’ proposals be rejected, prospects of a deal will wane, and the country will largely be seen as jogging briskly towards Grexit. ECB liquidity support will disappear altogether, and if anything the government might have to make capital controls even stricter. Then it will have to restructure the banking system on its own, starting with imposing a haircut on its uninsured depositors.
If voters, in spite of the government’s campaign, decide they accept the eurozone’s plans, Greece will then enter a long period of political uncertainty. Syriza can try to stick to power, a new coalition government can be formed or new elections called. In all three scenarios, it’s hard to see the ECB happily resuming its liquidity assistance for a nearly-bust banking system. Until, that is, it can see more clearly the direction taken by the country’s leaders.
In either case, the referendum is not the end of the Greeks’ financial problems.  Just the beginning of new ones.