Greece: a glimmer of light

by George Hatjoullis

Finally something positive. Not much, but something. Tsipras has managed to elicit a joint statement from all the Greek party leaders (Joint Statement) . The No vote was not about leaving the Euro but achieving a just and sustainable agreement. If the joint statement constitutes the beginning of a government of national unity for agreeing a settlement and implementing reforms, then perhaps the referendum achieved much more than seemed obvious last night. It is a faint hope but any hope is good. Unfortunately, this is as far as the good news goes for now.

The institutions will allow Athens one last chance to present a proposal that will form the basis for negotiation for a new aid programme. This sounds like something that may take time and Greece has none. The banks remain closed until, at least, Thursday. Every day corrodes their assets and, hence, their solvency. The ECB is not reducing the ELA but is requiring an unspecified improvement in collateral for existing loans or presumably a bigger haircut. Such collateral may be hard for the banks to find. It seems that unless the Greek proposals meet with approval in the next few days, the banks will fail to reopen as Euro-banks.

Approval will require concessions form the institutions as well, notably on the thorny subject of debt relief. This is a matter of importance to some EZ states as they too are democracies and have electorates to which they must answer. Most important is Germany. Where Berlin leads the other 17 will follow. At present, Berlin seems opposed to debt relief. It is however a matter of trust and if unity among Greek political parties is deemed sustainable it may help restore trust. However, I fear Greece is too late.

There is much talk of a parallel currency. This looks like the most likely outcome now. It will be billed as ‘temporary’ and avoid the thorny legal question of EZ membership. Greece will remain a member of the EZ and use Euros. However, it will impose temporary capital controls and the state will issue IOUs to fund expenditure. The IOUs will be exchangeable for Euros at some market rate and it will be possible for corporations and households to use these IOUs to transact. They will constitute a parallel currency. An internal devaluation will thus be possible. It is unlikely anyone will want to hold these IOUs as wealth so demand for cash Euros will be high. The government may also try to legislate on the holding of cash Euro notes in safes, safe deposits, mattresses etc. It is not a long-term solution but it may buy some time. Greece will either need to implement reforms and meet conditions for rejoining the eurosystem or leave altogether and restore the Drachma. Although Treaty offers no guidance, an agreed departure is almost certainly possible, allowing Greece to remain in the EZ.

Once the blame game begins some will say that it is easy to see with hindsight. True enough but in the case of Greece, and indeed the wider EZ, many of the problems of the past 25 years were obvious at the time. They were highlighted and commented upon by many (including myself). The political imperative overwhelmed any criticism of architecture, the suitability for membership, the ridiculous intra EZ yield spreads and the daft justifications for these spreads and so on. No one wanted to hear. The EZ project is about to make another qualitative shift to a new condition of existence. It is not going to fail. It is going to discover how to deal with a problem like Greece. At the same time, Greece is about to discover that heroism is no substitute for pragmatism, diplomacy, good housekeeping and, above all, a reputation for integrity.