Greece Default, the Referendum and Political Shenanigans

On 17 June I retweeted an article from ekathimerini with the heading “Tsipras ready to take responsibility for rejecting aid deal”. The article reports Tsipras as saying that:

With a viable solution “the Greek government recently elected by the Greek people will bear the cost of carrying through this difficult agreement,” Tsipras told reporters in Athens on Wednesday. Without one, “we will assume the responsibility to say ‘the big no’ to a continuation of the catastrophic policies for Greece.”

No mention of a referendum. Yet he has not taken responsibility. He has shifted responsibility to the Greek people. In fact what he has done is a default without formally defaulting. By the time of the referendum Greece will be in default to the IMF. The IMF has discretion but will not exercise this in Greece’s favour. The creditor deal on which the people are ostensibly voting will no longer be available. It is conditional on Greece legislating reforms by Monday 29 June. This will not have happened. The Institutions will not extend the deadline. The referendum is irrelevant, if indeed it takes place.

Politically Tsipras has been quite cunning. He has defaulted (the big NO that he promised on the 17th June) but without doing so explicitly. He will now claim that the default was the fault of the institutions refusing to allow time for a referendum. It will be another example of the eurozone trampling on national democracy. Very cunning. Very sharp, in fact so sharp he may cut himself this time.

So what happens now? If he does not impose capital controls Greek banks will be denuded of all deposits by July 5. The ECB will either extend ELA or not. If it does not then Greek banks will be unable to fund the outflows and will close their doors. One must assume the ECB will not extend ELA. Tsipras must be hoping that, faced with de facto default, the Institutions will come back with a more acceptable deal; the 13th hour reprieve that I discussed in a previous blog. Unfortunately, this method of default will make this difficult. Tsipras has shot himself and Greece in the foot. There may be no 13th hour reprieve. Greece will now default and become isolated for some time. It is game over for the moment. The markets must confront this on Monday.

Greece cannot be formally ejected from the eurozone despite its behaviour. It is unlikely to choose to leave. It may also be confronted with social unrest as the reality of the situation dawns on the Greek people. Two groups may clash. If euro exit becomes likely, darker forces may emerge. Syriza had a legitimate grievance. The approach it took coupled with the inevitable intransigence of the institutions, however, has resulted in the worse possible outcome. History will look back and ask how it came to this.