12 June 2015

The steps that lead to Grexit


On Thursday the IMF went home from the Greek crisis talks. EU officials briefed that Commission President Jean-Claude Juncker’s meeting with Greek Prime Minister Alexis Tsipras had been the “last attempt to make a deal possible”.

This followed on from financial market exultation at leaks that a deal was imminent. Why anyone believed that is a bit of a mystery, after various Eurozone Finance Ministers took to twitter earlier in the week to denounce Tsipras’ speech in Parliament last Friday, rejecting the Eurozone’s offer, as meaning there was nothing left to negotiate about.

Many commentators still confidently declare that a deal will be done.  What they have in mind is beyond me. Perhaps a few still dwell under what was always the strange delusion that Tsipras’ real ambition was to split his governing coalition group, Syriza, and instead lead a pro-troika government of national unity? If his actions over the past six months haven’t dispelled that notion one struggles to know what would.

Others expect a last-minute surrender by the Eurozone. On what, though? The absolute bottom-line for Syriza is securing debt relief, so as to remove the blight on investing in Greece that comes from a pending future of year after year of expected inevitable default. The absolute bottom-line for the Eurozone is no debt relief, because that would violate the EU Treaties even more nakedly than was done by the original Greek bailout, because that would lead to Portugal, Spain and others demanding similar forgiveness of the loans they received from their Eurozone partners, and because there is no way on God’s green earth that the parliamentarians of Finland, the Netherlands, Germany, Slovakia, Spain, Italy and others are going to vote Greece another €30-€50 billion bailout this month if Greece has just defaulted on the loans they’ve already been given — and no point in agreeing any kind of deal with Greece that does not include that €30-50 billion, which is needed to keep Greece going from July onwards (when the current bailout expires).

There’s obviously still enormous uncertainty about events. But one can now sketch a very approximate base case for what happens next. First the Eurozone will probably provide a take-it-or-leave-it offer direct to the Greek people as a whole (over the heads of the Greek government) early next week.  Tsipras will say that that offer was already rejected by Parliament in the meeting last week.  Greece will then refuse to make any more debt payments to any “official sector creditors” — i.e. to the Eurozone, the ECB or the IMF.  There will thus be a series of defaults.  Once the formal defaults begin, the European Central Bank will stop extending Greek banks any additional emergency liquidity assistance.  Two or three defaults in, the ECB will call in its loans to the Greek banks.  The Greeks will then institute capital controls – a disaster during the main tourism season.  The defaults will not intimidate the Eurozone as the Greek government hopes.  Tsipras will probably call a snap referendum on whether to accept the Eurozone’s terms (probably with no mention of the euro on the ballot paper).  Submission will be rejected.

Grexit will follow almost immediately.

Andrew Lilico is Chairman of Europe Economics.