Far from humbly accepting that Greeks want to keep the euro more than they want to reverse austerity, as it appeared to me in March that he had, Tsipras is making the most wildly high-risk bet he could possibly make. In poker terms, Tsipras has just pushed all his chips into the pot and dared his opponent to call – while holding the worst of all possible poker hands. Unless he’s extremely lucky, he’s going to crash out, and probably never play a major tourney again.
The play now goes to the people of Greece, who in this game can either confirm or reject his bet. He’s campaigning hard for a “no” vote against accepting the terms that have been offered to roll over Greece’s debts, and doing his best to persuade Greeks that if they support him, European leaders will fold and improve their terms.
If the vote goes against him, then Tsipras is out, and some new, more pro-European government will probably replace him, probably after another general election. But he will very likely win, mainly because he has given Greeks so little time to live and think through the real implications of a “no” vote.
Greeks are getting a taste of it this week, and it’s not at all pleasant. Sending money abroad is banned. Withdrawals of banknotes from bank accounts are limited to €60 a day, and practically available only to those who line up early at ATMs. Pensioners who wanted their pensions in banknotes were offered one partial payment of €120 this week after waiting in long, angry lines.
Some importers can still make payments abroad, if they receive approval from a newly established government committee. And Greeks can still make bank-to-bank payments among themselves, with payment cards or online. But Greek bank deposit balances are obviously already worth less than face value.
I haven’t yet seen anyone report a market exchange rate of cash euro banknotes for bank deposit balances, but I’m sure it would be hard to get more than 50 cents on the euro. Big businesses are facing a very tough decision whether to continue accepting payment cards and bank transfers, and most small businesses have already stopped.
And even this situation is too good to last. Greece can’t afford to keep up those €60 and €120 payments. Soon the euro supply in Greece will dry up, and the government will only be able to offer some kind of new notes, which will probably be nominally valued in euros but worth less than half their face value.
In other words, Greeks’ real spending power just fell off a cliff, and it’s going to roll further downhill from here.
Grexit: officially impossible, de facto all too likely
But many people will gladly suffer a week of hardship for what they see as a patriotic stand-off, and many will be willing to risk suffering more and longer.
If Greeks support him, Tsipras will continue to steadfastly deny that he’s quitting the euro, and technically, he won’t be. Despite what you might have read, there is in fact no way whatsoever to formally expel Greece from either the Euro Area or the EU.
To kick Greece out of the EU or euro, the EU would first have to amend EU treaties to allow it. That would be an agonizingly slow and difficult process, similar to amending a federal state’s constitution. It would unsettle other periphery countries, and invite anybody and everybody with a complaint about the EU to try to inject it into the treaty process. Nobody wants to open that can of worms right now, or for that matter even suggest the possibility.
So even if Greece de facto introduces another currency, which is very likely, the rest of Europe will still consider Greece to be formally a euro member. And legally that’s what Greece will still be.
If the “yes” vote wins on Sunday, and there’s a prompt election of a new, pro-European government, I think Europe will make a serious effort to rescue the Greek economy and restore it to its June status quo ante. There would be no new Greek currency.
But if Tsipras wins, the odds that European leaders will fold and cave into his demands are practically zero. To return to the situation that prevailed in June, Tsipras would need to convince the EU to welcome him back to renewed negotiations and the European Central Bank to renew its support to Greece while those negotiations proceed.
Call me pessimistic, but I for one just can’t see that happening, no way no how. The negotiating table that Tsipras wants to go back to no longer exists. If he wins the vote, he will be left to manage the Greek economy without European support, and Greeks will be left to learn the hard way how much they like that. Europe will wait for Tsipras’ government to fall, which probably won’t take all that long.
Greece is almost out of euros
It’s hard to say exactly how many euros remain in the Greek banking system, but it can’t be many. As of the end of May, there was somewhere between €4.2b and €4.9b in the banking system under the control of the Greek government and Greek banks, down from somewhere between €8.4b and €10.4b at the end of December.
The Bank of Greece (the national central bank) also had €2.6b of unused “emergency liquidity assistance” allowance as of the end May. ELA is a way that the ECB permits Euro member NCBs in crisis situations to create euros and loan them to local banks in return for substandard collateral, which the NCB must guarantee to the ECB. The point is that Greece being a junk-rated sovereign has very little quality collateral, and what little there is has already been pledged. The BoG’s total allowance has been raised by €8.8b since then, to €89b as of June 26.
But increases in the BoG’s ELA allowance are generally signs that the Greek banking system has bled even larger amounts of cash. The ECB raised the BoG’s ELA allowance by a total of €11.9b in March through May, while a net total of €14.4b was wired abroad or withdrawn as banknotes from Greek banks during the same period. Even when the ECB was supporting Greece with repeated ELA allowance increases, the supply of euros in the Greek banking system was gradually dwindling.
The BoG also had €5.3b of gold and €19b of debt securities not including those held for ECB monetary policy. I don’t know if the BoG could or would consider selling those. The government must also have some banknotes in safes and cash drawers.
Meanwhile, even after all the austerity, Greece has still been running a current account deficit of around €800m a month for most of the year. Last year that swung to a large surplus during the summer tourist season, with more than 40% of the year’s international tourism revenues coming in July and August. I’m afraid this summer’s tourism revenues will be far lower.
In any case, the current account must right now be undergoing a hard, sudden adjustment in the positive direction. Most payments abroad are blocked, and people’s limited ability to spend from their bank accounts must be cutting deeply into sales of fuels and other imports. In any event, without ECB support, Greece must balance its inflows from exports and tourism with outflows for imports.
The government can’t for long on top of that pay to distribute euro banknotes through ATMs and to pensioners, even in seemingly limited amounts. Withdrawals of €60 a day per person can add up quickly. There are at least 6,000 ATMs in Greece and more than 8 million adults. If the ATMs are well stocked, outflows could easily exceed €100m a day.
Think Argentina, not Cyprus
If the “yes” vote wins on Sunday, the following section will probably be scratch. But given the strong chance Tsipras will get the “no” vote he’s looking for, it’s worth looking at what would come next.
There would be, I’m sure, no return to serious talks anytime soon and no further increases to the ELA allowance. Within no more than a couple weeks, Tsipras would be forced to admit that even limited disbursals of euro banknotes are no longer possible.
This situation is a close parallel to what Argentina went through in 2001. Whatever funds aren’t withdrawn while the €60 a day allowance lasts will be permanently devalued.
Greece’s experience with “capital controls” won’t be anything like that of Cyprus, which enjoyed continued ECB support and had some relatively easy ways available to improve its current and financial accounts. Greece will have much more capital flight, and is likely to undergo a long period of political uncertainty when inward investment will be very limited. “Capital controls” is a shabby euphemism for what’s happening in Greece, which is a sudden collapse of the real value of bank deposits.
The only way Greece could afford to keep the euro as its actual everyday currency without ECB support would be to apply sharp haircuts to bank deposits. That of course would be political suicide. It’s not in Tsipras’ nature to be so brutally honest.
Instead, look for Tsipras to introduce a new de facto currency, with a nominal value in euros, but backed only by the Greek government. These could be called “IOUs” as many are suggesting, or whatever, it’s not important. Banks would open and offer pseudo-euros, not euros, to anyone wishing to withdraw from their accounts.
All the while Tsipras will insist these are temporary measures and that Greece remains officially a euro member. And the latter at least will be true. I expect a Greek pseudo-euro to be worth less than half a euro.
The big question is how the Greek government will deal with imports and foreign payments. The intelligent way to do it would be to dispense with all pretenses and force all holders of pseudo-euros to buy hard currency at market exchange rates. Banks could then make foreign payments from anyone’s bank account or card by simply applying the market exchange rate.
In other words, one possibility is that the new Greek currency could be a de facto separate floating currency, linked to the euro only in name. In such a scenario Greece would suffer a short steep recession but could recover relatively quickly from there.
But there’s also a stupid way to do it, which I fear is likely to happen. The government could maintain the pretense that its pseudo-euro is actually worth a euro. The government and other privileged organizations would be able to convert pseudo-euros to euros one-for-one, while most people and companies would have to
go to black-market money-changers to buy real euros.
In other words, another possibility is that Greece could become a dual exchange-rate country, like Venezuela or the communist parts of Europe back in the 1980s. And that of course would be an economic disaster.
But let’s face it, when left truly to his own devices, this is the kind of thing that Tsipras will very likely do. Indeed there’s already an element of dual exchange rates in place: a new Committee For The Approval of Bank Transactions is deciding which importers have the privilege of being able to convert their Greek bank deposit balances to euros.
(The chart data is all from the BoG: BOP data, aggregate bank balance sheets and BoG balance sheets version 1 and version 2. ELA appears in version 1 under “other claims on euro area credit institutions.” I did some addition and subtraction.)
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