In other words, the Greek nation has thrown itself behind Tsipras’ all-in bet that European leaders will fold and bow to his demand to roll over Greece’s debts on looser terms. Even though Greeks are holding the weakest of all possible hands.
Greeks simply don’t have much in the way of credible threats to hold over the rest of Europe, especially since markets are reacting fairly calmly. The only potent card they have, if Tsipras is willing to try to force them to play it, is their willingness to endure what could be widespread suffering, if he carries out his threat to let Greek banks run out of euros and not introduce any new currency.
The bet is to the ECB Council
Play now goes to the European Central Bank’s governing council, which will hold a conference call on Monday to decide how to react. Just before that, the ECB chairman, Mario Draghi, will hold a conference call with top EU political leaders.
Hanging over the council’s decision is one powerful fact and another powerful inevitability. The fact is that Greece defaulted on June 30 to the IMF. Due to cross-default clauses, Greece has since also been declared in default on most of its debts to the EU by the EU’s bail-out fund, the European Financial Stability Facility.
The inevitability is that Greece will default on €2.2b of principal and interest due to the ECB and another €1.4b of principal and interest due to Euro Area national central banks. The €3.6b of payments are due July 20.
The council has three options, but realistically, only two. In theory, the ECB council has the power to inject new liquidity into Greek banks and allow them to open and start paying out on deposits normally. The council would have to vote to increase the cap on Greece’s use of Emergency Liquidity Assistance, a way that EA NCBs are allowed in crisis situations to create and lend euros to their banks against substandard collateral.
Such ELA loans are backed by the NCB’s own guarantee to the ECB. Which could be a little difficult for the ECB council to justify accepting just now, given that an NCB’s guarantee is only as good as that of the government behind it, and the Greek government is in default to another EU institution.
The second option, and the nicest the ECB council could realistically be to Greece in this situation, would be to maintain the cap on Greece’s use of ELA at its present level of €89b. That would allow Greek banks to continue to disburse €50 or €60 a day to depositors for a little while longer. Nobody outside the Greek government and banks knows exactly how much cash and unused ELA allowance Greece has left at the current pace of withdrawals, but I think not more than a few weeks worth. See here.
The third option, which ECB councilors will likely feel legally compelled to take despite how harsh it is, would cancel most of Greece’s ELA allowance except the €2b that all NCBs are normally permitted. According to an ECB summary of the secret rules governing ELA, any NCB with an ELA allowance above €2b automatically loses it unless re-confirmed by a council majority “within a pre-specified short period of time.”
The council has lately been holding ELA re-confirmation votes for Greece about once a week, most recently on June 28, after Tsipras called the referendum but before he missed the IMF payment. My guess is that without a positive vote, the €89b ELA allowance would expire sometime this week.
Losing the ELA allowance would mean Greek banks would run out of cash faster. They would probably stop reloading ATMs the next day. It would amount to an order from the ECB to the Bank of Greece (the national central bank) to immediately recall about €87b of loans to Greek banks. The BoG would probably be obliged to seize Greek banks’ deposits at the BoG, without which they would have no way of paying each other electronically. The BoG might even be obliged to come for the banknotes in their vaults and cash drawers.
The argument for taking the nice option will be to leave a door open to Tsipras to make his new offer, and that Monday is simply too soon. But I don’t sense that European leaders are really expect much serious from him, or that they’re really all that eager to see what he comes up with. The argument for taking the harsh option will be that with the Greek government in default to the EU, the ECB can’t accept the guarantees of the Greek national central bank.
The council is very different from other EU bodies, as it decides by simple majority, and small countries carry much more weight. The ECB council is made up mainly of the 19 EA NCB chairmen, plus six EU-appointed ECB governors, including Draghi.
That means Germany lacks the veto power at the ECB that it has over most EU bodies, which is good for Tsipras. But it also means the former communist European countries carry a lot of weight at the ECB, which is very bad for Tsipras. The council tends to follow Draghi, and if EU political leaders weigh in strongly one way or another, that would likely carry their vote.
The Greek nation volunteers to be taken hostage
Tsipras knew what he was getting into. I’m pretty sure his voters did not know, and it will not be a pleasant awakening.
The Greek nation has essentially volunteered to be Tsipras’ hostage as he heads into his final show-down with European leaders. Tsipras says he is determined not to issue any new currency. But his government and banking system are very near to running completely out of euros. If he continues to resist issuing a new currency, and Europe gives him no fresh supply of euros, the economy will collapse into deep crisis.
The first big problem for Tsipras is that he has made European leaders hate him. They want very much to do him personally no favors.
His second big problem is that the EU strictly adheres to the rule of law, and he is in the wrong side of it. His government is in default to the EU and will be soon to the ECB and EA NCBs. That greatly limits European leaders’ options.
And the third big problem for Tsipras is, when the money runs out and the cupboards run bare, Greeks will not stay behind him. Despite the convincing vote, there will soon be mass protests against him. If we take Tsipras at his word that he will not issue any new currency, then when euros run out, Greeks will literally starve.
Tsipras will probably back down long before it gets that far, probably by introducing IOUs or some other kind of pseudo-euro and denying its a new currency. I don’t rule out that he could ultimately cave in and accept Europe’s conditions for a roll-over of Greek debts.
But the Greek people have committed themselves to a very dangerous bet. Tsipras and his game-theory professor finance minister, Yanis Varoufakis, could be planning to deliberately make the Greek people suffer in order to pressure the EU to back down. But the pain would really be all Tsipras’ doing, and it wouldn’t take his hostages long to figure that out.
[UPDATE: The ECB council chose the nicer of its two realistic options, and kept Greece’s ELA cap at the same level it had been for about two weeks, which Bloomberg reported a bit more precisely at €88.6b. Haircuts on collateral were increased, but not by so much that Greek banks can’t make up the gap with other collateral. All in all a very mild reaction to Greece having defaulted to the EU and IMF. There will be lots of meetings ahead, but probably the most important upcoming events are 1) the inevitable default of Greece on €3.6b owed to the ECB and EA NCBs on July 20, 2) the ECB council’s reaction, which could be immediate or after a likely grace period expires, 3) the inevitable exhaustion of Greek banks’ euro supply, anytime within a few weeks and 4) probably about the same time as that, the introduction of new money, probably some kind of pseudo-euro, backed only by Greece.]
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