The final outcome of the Greek debt crisis has been obvious: the writing off of a chunk of what it owes, and its leaving the euro. But for six years, no true “European” has been willing to have their fingerprints on the instrument that brings about the inevitable conclusion.
Since the February 2015 “deal”, the parties have inched close to a new agreement about the previous agreement in a prolonged battle of alternative drafts. On Saturday 27 June 2015, Greece’s Syriza-led government refused to commit to the terms presented by creditors, choosing instead to call a referendum on the subject.
While the referendum scheduled for 5 July will ask the Greeks for a simple yes or no, the lengthy question is far from clear: “Should the draft agreement submitted by the EC, ECB, IMF to the eurogroup on June 25, which consists of two parts that make up their full proposal, be accepted? The first document is titled ‘Reforms for the completion of the current programme and beyond’ and the second, ‘Preliminary debt sustainability analysis’.” Are Greeks being asked to vote on the agreement, membership of the single currency, participation in the European Union itself — or all of these things? The referendum may be unconstitutional.
In any case, with additional support from the European Central Bank for Greece’s banks suspended, there is no certainty that Greece, or at least its banking and financial system, will even make it through to the referendum date. The imposition of banking holidays as well as restrictions on withdrawals and transfer of funds overseas will severely disrupt activity.
The agreement that the Greeks are being asked to vote on is meaningless. The terms represent a few concessions by the creditors but they require almost total capitulation by the Greek government. The agreement commits Greece to a primary surplus (the budget position before interest payments) of 1 per cent in 2015, rising to 3.5 per cent by 2018.
There is disagreement about the mixture of spending cuts and tax increases necessary to achieve these targets. But the agreement cannot address the real issues.
It is only for five months, necessitating a further, more comprehensive programme, which will probably require creditors to provide new financing to Greece (in effect a third bailout) if complete default is to be deferred.
The focus has been on the release of €7.2bn from the existing programme, later increased to around €17bn. It is unclear how much money Greece actually needs.
Greece has commitments of around €5bn to €10bn each year, plus the continuing need to roll over about €15bn in short-term Treasury bills. It may not have the ability to meet these obligations as time goes on. Debt repayments or relief are not addressed, other than in vague terms.
The political uncertainty, capital flight and a weak banking system have resulted in a contraction in activity, making budgetary targets difficult to meet. If growth falls further with the continuation of austerity the primary surplus objective will be missed, creating additional funding needs.
The obsessive emphasis on budgets ignores structural reforms. Many of the proposals are old, and successive Greek governments have proved poor at implementing them. The banking system is on ECB life support.
Whether the answer to the proposed referendum is nai (yes) or ochi (no), it is unlikely that anything will be resolved.
If the Greek plebiscite approves the agreement, there may be no offer on the table to assent to. Once the scheduled €1.5bn payment due is missed, the IMF has made it clear, it will not be able to provide funding until the arrears are remedied. Germany has made it clear that IMF participation is required for its support.
If the agreement is rejected, as the Syriza government is urging, then the fundamental issues – debt, new funding and membership of the euro and the EU – remain unresolved. The withdrawal of ECB funding for Greek banks after a rejection of the deal means the financial system is on the precipice.
Political uncertainty will continue.The Greek Prime Minister, Alexis Tsipras, is vulnerable. A yes vote would undermine his position and his government. A rejection may not be any better. The government will face a deeply divided population which has consistently chosen the contradictory position of rejecting austerity and repayment of odious debt while wanting to remain part of the eurozone.
The creditors and taxpayers in eurozone member countries now face large losses on their commitments. There are deep divisions within Germany and within the eurozone. Europe’s handling of the Greek crisis has revealed its inability to face up to inconsistency between a single currency and monetary policy, national fiscal policies and the lack of political integration. It has also exposed a ponderous decision-making process.
Both sides are trying to put a positive spin on events. But if this is a win for anybody then it is reminiscent of French philosopher Jean Paul Sartre’s observation: “Once you hear the details of victory, it is hard to distinguish it from a defeat.” Whatever happens it will destroy the lives, hopes and futures of many Europeans, in Greece and elsewhere.
Satyajit Das is a former banker and author of ‘Extreme Money’ and ‘Traders, Guns & Money’