Greece votes NO: so what?

by George Hatjoullis

The NO vote in the Greek referendum gives Syriza an emphatic mandate from the Greek people to negotiate a deal with the institutions. This much is clear. What is not clear is why they felt they needed such a mandate. They were elected to negotiate a better deal and had only been in power a few months. Was this not a mandate? Formally, the referendum was about a specific set of proposals from the institutions. This was, however, rendered meaningless as the proposal expired before the referendum was held. Indeed while the referendum was being held, Greek banks were closed and subject to withdrawal restrictions and Greece failed to meet a payment to the IMF. There is some debate as to whether the latter yet constitutes a default but as far as the EFSM/ESM is concerned it is a default. This has triggered cross-default provisions and rendered all EFSM/ESM loans to Greece callable. The existing bailout programme has expired and a new programme requires a whole new negotiation and Memorandum of Understanding. All assistance will come with conditions. To the experienced observer. Greece has just dug itself a deeper hole. A high price to get reaffirmation of a mandate that was never really in doubt.

The immediate problem is the banking system. It is dependent upon ELA from the Central Bank of Greece but the extent of this ELA is controlled by the ECB board. The latter is bound by certain procedures. It has a primary duty to protect the Eurosystem. In pursuit of this objective it is unable to extend ELA to banks that are deemed insolvent. Prior to the announcement of the referendum ELA had been regularly increased so presumably the banks were not judged insolvent. On the declaration of the referendum, ELA was frozen at the existing level. It was this decision that forced banks to close and restrict withdrawals. The implication is that the referendum directly called into question the continued solvency of Greek banks.

This might be justified in two ways. First, Greece was no longer in a bailout programme and thus holdings of Greek government debt could be deemed degraded as to credit quality. Second, the closure of the banks and consequent disruption to domestic economic activity would degrade other Greek bank assets. In reality, Greek bank solvency has been something of a smoke and mirrors exercise ( I am told) because much of the capital consists of tax credits which are of no value unless there are profits.

The other interpretation is that the ECB is making quasi-political decisions. It chose to support Greek banking as long as the negotiations were taking place and Greece was not in arrears. It decided to cease to do so when negotiations ended and Greece went into arrears to the IMF. The Greek government could challenge the ECB in the ECJ but does it have time and would it win? It does not have time and so far the ECB has proved very good at judging the legality of its actions. I would not go there.The Greek people will thus wake up to closed banks at least until the Government resumes talks with the institutions. However, this may take a while and each day the banks are closed, their assets degrade.

Once negotiations resume then there is the prospect of concluding successfully. Greece needs debt relief and reform, not austerity. Everyone seems to agree on this except Berlin and its acolytes. Unfortunately, Berlin is very important. The concern of Berlin is trust or rather the lack of it. They do not trust the Greeks to reform and will not concede debt relief up front, so to speak. In addition, they fear it will encourage copy-cat challenges across the eurozone. In reality, the Greek situation is uniquely bad and needs special consideration but this has yet to dawn on Berlin. Berlin seems willing to risk repudiation of all debt by Greece and, ultimately, Greece leaving the eurozone.

Greece is thus still at the mercy of the institutions. The referendum has changed nothing in this respect. The Syriza government has generated much antipathy with the people on which it remains dependent. Some people regard this as heroic. I regard it as un-pragmatic. It may be that the institutions and the Syriza government find some way to put aside the acrimony and distrust and find common ground. After all, they have common interest. Unfortunately, other than romantic optimism there no reason to assume this will occur and certainly not quickly. Time does not favour Greece.