Greek crisis: what comes after Oxi?

On two things, everyone is agreed. First, the “resignation” of Greek Finance Minister Yanis Varoufakis and his replacement by Euclid Tsakalatos, an Oxford University-educated academic and long-serving Syriza Party member, was a goodwill gesture by Alexis Tsipras to the country’s creditors. That said, the problem has never been about individuals, per se, but about systemic issues within Greece, and conflicts with her creditors. I discussed these in yesterday’s longish post. The new minister is no less of a Marxist persuasion, is insistent on debt relief, and a protagonist of Syriza’s agenda, but, crucially, is opposed to Greek exiting the euro.

Second, if Greece is to avoid another—and even worse—economic disaster outside the euro, time is running out quickly. It is already in technical default to the IMF, and will be in outright default to the ECB if it can’t repay €3.5bn on 20th July. The banks remain closed and will probably run out of money within a week as things stand. At that moment, the government will move to introduce a parallel currency to allow banks to function and to pay bills and taxes. It need not take the form of cash initially, and the government will insist that it has an exchange value of 1:1 against the euro. Some economists advising the Greek government think this is an optimum solution enabling Greece to stay in the euro. More likely, it will mark the first step towards ending Greece’s participation.

Only two things can give Greece a stay of execution now. The most immediate is to keep the banks functioning. Yesterday the ECB again maintained the €89bn cap on the Emergency Liquidity Assistance lifeline but raised the amount of collateral that they have to post for this facility. Without additional help, which may not be possible without a political agreement, the banking system will continue to bleed and put deposits at risk. If Greece defaults on the ECB, the lifeline will be cut.

What the ECB does will also be determined by this evening's eurozone summit meeting, at which Tsipras will present new proposals. He seems to have found a bit of sympathy from France and Italy, but it’s unlikely the latter would risk a spat with a seemingly more rigid Germany. In any event, decisions have to be unanimous. An outcome designed to keep Greece in the euro for more than a few months, entailing a third bailout that could run to well over €40bn, requires everyone to have a road-to-Damascus conversion. The creditors have to grant Greece debt relief, probably up front. Greece has to subscribe to another memorandum of understanding. Put simply, a more credible commitment to both increased austerity and difficult reforms is urgently needed from Tsipras and his government.