As the minutes tick down to midnight, the euro area seems to be about to give the Greek government a `take it or leave it’ offer. The existing programme expires on 30 June. If it does expire, then it is very difficult to see how the ECB could justify exposing further euro area tax payers’ funds (for they are the ultimate guarantors of the ECB) without an agreement by the elected political leaders. Indeed, it would be difficult to maintain the current exposure – now more than €80 billion in short term liquidity alone.
The citizens of Greece may not appreciate the full magnitude of the process that would be triggered:
· Greek banks would suffer an instant liquidity crisis that would require the imposition of limits on withdrawals – “capital controls”. As at end-April, Greek customer deposits had fallen to €138 billion (of which €62 billion are `overnight’ and a further €62 billion are under one-year maturity – virtually all of which are being withdrawn as they mature). It is astonishing that citizens continue to hold an average of €14,000 per voter!
· A highly significant portion of the Greek banks’ capital base would be questioned as “deferred tax assets” – thought to be around 40% of Tier 1 capital – would be scrutinised. The excellent report from Bruegel spells out some of the issues. If the Greek Government has actually converted these into credits from it, then the euro area’s Single Supervisory Mechanism would have to re-assess the capital position of these banks once the Government has gone into default. Resolution of the entire banking system would be likely – with devastating economic consequences.
· Deposit guarantee funds are not designed to cope with the insolvency of the entire system and a Government-in-default would manifestly be unable to issue a guarantee in euros. It could offer a guarantee in some parallel currency but depositors should expect a very substantial haircut in the purchasing power of their savings.
In practice, this no longer an economic problem but one of democratic legitimacy of the Syriza party (with 36% of the vote at the election) and the violently anti-bailout ANEL coalition partner (5% vote share). However, ANEL have the vital 13 seats in Parliament that takes the Coalition 12 seats above the 150-seat threshold for power.
Brookings’ Doug Elliott published a very helpfulpaper yesterday that spelt out the nature of the Syriza party (as well as any non-Greek can) highlighting that a significant number of their MPs are effectively Communists. As the Greek electoral system is one of `re-enforced’ proportionality, this means that the representatives of perhaps 10% of the 64% of Greeks who voted in January (so just 6% of the electorate) can reject the euro area proposal and bring certain devastation upon the other 94%. According to the opinion polls, fresh elections would probably not bring a radically different mix of Parliamentarians.
Is this the moment for the Gordian knot of Greek politics to be cut though with a referendum to enable all voters to give a view on whether they want to lose an `average’ of say €5000 or more each? Or might the 94% prefer to take the opportunity to create a political revolution and change the nature of Greek politics and thus their economic prospects?