Greek referendum: Between Scylla and Charybdis

Greek referendum

Essentially, the moment Alexis Tsipras decided to call the referendum last Friday night, the prime minister put himself in the same shoes as George Papandreou back then, only this time the eurozone is not freaked out about the prospect as it feels much more confident behind the defence mechanisms that were built during the crisis years and believes the operation to “ringfence Greece” is complete.

Officially, Greeks are expected to decide on a proposal by the country’s lenders that the government claims was handed to it as an ultimatum on Thursday 25 June. Documents from the lenders, on reforms policies, debt sustainability and the immediate financing needs, have been formally submitted to Parliament and, based on those, as a nation we have to decide to adopt and implement them or not.

Since 25 June, the troika, through the European Commission, has submitted more updated conditionality documents and the Greek government has made a number of frantic submissions in an attempt to close the gap and come closer to the lenders’ demands.

To make the scenario even more paradoxical, the troika has withdrawn all versions of its proposal and is not even willing to engage in discussions with the Greek government on its request for a new, third programme until after the referendum.

If we actually needed to find adults in the room, it is hard to find any in all of this.

This nearly comical situation is also highly emotional, which is quite understandable considering the economic devastation that the troika has inflicted on my country. On the one hand, you have the avid supporters of Greece’s European path, those who advocate the need-to-stay-in-the-heart-of-Europe argument. On the other, there are those that feel that this referendum is an opportunity to send the eurozone, and the IMF, a strong message for the need to change course, a sense of resistance.

Usually in such a charged atmosphere, it is wise to take a step back and take the pragmatic approach.

The Greek government is campaigning against the proposal and is pushing for a decisive No vote on the basis that it will strengthen its hand, opening a new round of negotiations with the troika and a swift deal with better terms.

This is where Alexis Tsipras’s logic loses me. The man has been battered for five months in negotiations that led to proposals that made his pre-election campaign promises seem like a distant memory. The troika appears to have been moving the goalposts even after he was told that his complete capitulation was a good basis for discussion and leaked a document full of red ink, giving the world the impression that they wanted show who is in charge. The troika deleted half of the measures contained in his proposal – the good basis for discussion, that is –effectively demanding him to further concede on VAT, pensions and the labour market, just one week before the programme’s expiry date.

They have made it difficult for him in every imaginable way because they don’t trust him, they don’t like his ideological background and they think that he is setting a bad example for other movements across Europe that question the established eurozone orthodoxy.

They have made these views abundantly clear in the public debate. Naturally this raises the question what makes Alexis Tsipras believe that with a No vote he will find himself in a better negotiating position and that the other side will be in any way inclined to offer him a deal that has repeatedly been denied.

Leaving aside the fact that there is not a proposal on the table to evaluate, even the argument of the symbolic nature of a No vote ignores a hugely significant development since last Friday. The imposition of capital controls, the closure of banks and the generally restricted movement of capital.

Having already established that Greece’s lenders have the upper hand, even in the optimistic scenario that a No vote on Sunday will kick off a period of negotiations for a new package with Tsipras’s government, the capital controls will remain in place – they will actually remain in place for quite a while if past experience is anything to go by – which will have a major impact on the Greek economy, hitting budget revenues hard and throwing the overall budget off track and into a deep primary deficit.

With the troika certain to make no disbursements, heavy austerity will be necessary to bring the books back into balance so the state will be able to run basic operations. While a No might send a symbolic message, given the latest developments Greece in reality is heading again for serious belt tightening, this time not imposed but due to our own fiscal constraints.

An even bigger constraint following the referendum is time because there is a hard stop on 20 July when Greek bonds held by the Eurosystem need to be repaid. While Tsipras has used time as if it was readily available, soon it will be a scarce commodity.

Although being in arrears to the IMF did not seem to have an impact on the ECB accepting Greek state guarantees as collateral for emergency liquidity assistance, if Greece defaults on the ECB itself then that would be truly the end of the road. Greek banks will not only be restricted to the capped access of ECB liquidity as they are currently, they will have to swap state-backed collaterals and securities with other eligible collateral which they don’t have and will be effectively be cut off from any access to euros.

As I have argued before, a euro exit will not lead to a spectacular diplomatic event that will oust Greece out of the eurozone. Not having access to central bank money creation and with existing deposits corralled in the banking system via the capital controls, the only stock of euros in the economy will be the approximately 45 billion euros in cash in circulation. In such a scenario, any Greek government will be forced to consider other options. Greece could easily find itself in considerations for an alternative currency regime just as quickly as it found itself with capital controls.

A highly questionable attempt to get a better deal, a weak symbolic gesture calling for the end to austerity that seems to be coming back with force and, worst of all, the prospect of having to deal with a currency consideration under the type of duress that could cripple even the most efficient of public administrations, do not encourage my pragmatic self into voting No in Sunday’s referendum.

My Yes vote will not be motivated by the romanticism of those campaigning about staying in the heart of a Europe that no longer exists. Over the last five years I have seen countries coerced into bailouts by the most powerful institution in the eurozone, the European Central Bank; orchestrate the change of democratically elected governments because they were considered a threat to the orthodoxy; hold back on promises to even the most compliant of nations like Ireland and Spain; force the repurposing of an entire economy as they did in Cyprus; and selfishly approach the migrant crisis in the Mediterranean, just to take a few examples that have shaken my belief in the lofty European ideals and solidarity. The euro is not a bloc of prosperity comprising equal member states but a divided club between powerful creditors and weak debtors.

At this stage, my country finds itself between a bad and a worse choice. Developments since last Friday reaffirmed that once this crisis intensifies, it will be those that have been hit hardest in the last five years, the weakest and most vulnerable, that will bear the brunt.

My choice on Sunday is for the bad option.

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About the Author

The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.

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