Hang Tsipras out to dry, fine, but not the Greek people too

The Greek prime minister has backed himself into a corner. With his people facing €60 cash withdrawal limits at banks, they may well choose to side with Europe in a vote, writes Hugo Dixon

IT LOOKS like Alexis Tsipras is crumbling. After the banks closed and public opinion started moving against him, the Greek prime minister seems desperate for a deal with his creditors. Athens has now defaulted to the IMF, adding to the pressure. But it is not clear if lenders will cut him any slack. They may prefer to deal with his successor.

When Tsipras announced last week that Greece would hold a referendum on whether to accept a cash-for-reforms deal proposed by the eurozone and IMF, he said the proposals amounted to “possibly the humiliation of an entire people”.

The snag is that Tsipras did this when both the government and its banks were virtually out of cash. The ECB refused to supply any more liquidity to banks. As a result, the banks were closed and on Tuesday night, the government defaulted on a €1.5bn payment due to the IMF.

The immediate reaction of many Greeks to Tsipras’s referendum idea was to stand up to the creditors and vote no. But, since capital controls were imposed with cash withdrawals limited to €60 a day, opinion has started to swing towards yes. The eurozone countries also made clear that voting no would amount to quitting the euro, something most Greeks do not want.

Tsipras responded and told international creditors that Athens could accept their bailout offer if some conditions were changed. However, Germany said it could not negotiate while Greece was headed for a referendum on the aid-for-reforms deal.

In exchange for the conditional acceptance, the leftist leader, who has so far urged Greeks to reject the bailout terms in a referendum planned for Sunday, asked for a €29bn loan to cover all its debt service payments due in the next two years.

With queues forming at many ATMs a day after Greece became the first advanced economy to default on the IMF, and signs that supplies of bank notes were running low, Tsipras has been under growing political pressure to reach a deal.

Angela Merkel, Germany’s chancellor, said there would be no new negotiations until after the July 5 referendum.

All this seems a polite way of telling Tsipras: “You are too late, buddy.”

One explanation for this line is that it takes time to negotiate a new agreement and then get parliamentary approval. The same old numbers cannot be used because Greece’s economic prospects have deteriorated as a result of the past few days of capital controls.

A solution could be to cancel the referendum, an idea floated by Greece’s deputy prime minister. However, the creditors are so fed up with Tsipras that they are unlikely to make his life easy. They expect any negotiations to be slippery and doubt Tsipras’s radical left Syriza party would implement anything he agreed to. By contrast, the creditors may hope that the Greeks will now vote yes, that Tsipras will resign and a more constructive prime minister will take over.

Still, it would be wrong to think that a yes vote would lead to a quick or straightforward solution, because of the complexities of Greek politics.

One might think that opposition parties and Syriza could form a national salvation government. Something similar happened in 2011. Creditors would have little confidence that any government relying on Syriza would do what it promised. As a result, it would struggle to reach a new deal with its lenders and get the banks open.

Knowing all this, the Greek political parties might conclude that it would be best to clear the air by calling new elections. There’s no guarantee that the opposition would win such a vote because it is fragmented. It has not yet managed to rally behind a single figure and a common programme.

Even if the opposition won such an election, it would not be ready to start talks with its creditors until August. By then, the banks would have long run out of cash unless the ECB supplied more emergency liquidity, and the economy would be in a terrible state.

Benoit Coeuré, the ECB executive director responsible for negotiations with Athens, said that if Greeks vote yes in the referendum, he had “no doubt” that eurozone authorities would find ways to meet commitments towards the country. The snag is that it may struggle to find a legal route to provide more liquidity until a new agreement is reached.

Hawks in the central bank are have pushed for liquidity to be cut because of Athens’ default to the IMF, on the ground that the banks are heavily exposed to the government. But even if the ECB turns a blind eye to that, it can’t ignore the €3.5bn of loans due to be repaid to the ECB itself on July 20.

Hopefully, Coeuré’s reassuring prediction of how the eurozone will react if the Greeks vote yes will prove correct. After all, even if the creditors are willing to let Tsipras hang out to dry, they shouldn’t take the same approach to the Greek people.

Hugo Dixon is a columnist and entrepreneur