1. Column: Grexit will be hard to stop

Column: Grexit will be hard to stop

Tsipras must realise that without new sources of funds, his government could go bust next month

Updated: February 24, 2015 11:30 AM

Alexis Tsipras kept his promises to the electorate. That is the only thing that can be said in favour of the defiant speech the Greek prime minister gave parliament on Febuary 8. Almost everything else was terrible—because the pledges he made in the recent election campaign are undeliverable.

Athens is now set on a collision course with its euro zone creditors. The government will probably run out of money shortly, and have to impose capital controls within a few weeks. Unless that provokes a change of heart, Greece may soon have to leave the euro zone and bring back the drachma.

Tsipras has become a prisoner of both his own rhetoric and the left wing of Syriza, an already radical party. He has dug himself into positions from which he will find it almost impossible to compromise. Meanwhile, the euro zone has no interest in budging. Germany and its northern allies are taking their traditional hard line. But others—like Spain, Portugal and Ireland, countries which have been through austerity and are emerging from the tunnel of despair—are dammed if Greece is given a soft ride. Compromise looked possible until Tsipras spoke. Athens would have asked for an extension, in some way or form, of its current much-hated 240 billion euro bailout programme while negotiating a new deal. It could also have agreed a moratorium on its pledges while talks continued.

In exchange, euro zone countries and the European Central Bank might have agreed to let Athens increase the amount of short-term treasury bills it can issue—to stave off a cash crunch that will come to a head next month. The ECB might also have restored the safety net it took away from Greece’s banks last week.

As it is, Tsipras waved a big red rag to a bull. Not only did the Greek premier say he would not ask for an extension of the current bailout programme. He ploughed ahead with his controversial and unfinanceable pre-election promises. These include: hiking the minimum wage by 28%; unwinding labour reforms; increasing the tax-free income tax threshold by 140%; cancelling privatisation plans; and giving low-income retirees an extra month’s pension every Christmas. Tsipras didn’t stop here. He antagonised Germany by promising to pursue war reparations against the country for its invasion in World War II. The Greek prime minister also launched an assault on the banking system. He will end the immunity from prosecution enjoyed by directors of the Bank of Greece, the country’s central bank, and the Hellenic Financial Stability Facility (HFSF), the vehicle through which the euro zone pumped 50 billion euros to bail out the country’s banks. Further, Tsipras said the government would review the law so that the HFSF could exercise its rights in the banks without restriction. And he promised that banks would not be able to foreclose on people’s primary residence.

These banking system measures are controversial because the BoG and the HFSF are supposed to be independent from the government. It wouldn’t be surprising if some directors, once stripped of immunity, resigned. Meanwhile, the euro zone countries only agreed to lend so much money to recapitalise Greece’s banks on the understanding that the banks were kept at arm’s length from the government. They may not be happy that the bosses of two of the big four banks, Eurobank and National Bank of Greece, have quit.

Finally, the ECB may be worried that rules preventing banks collecting their debts will undermine their solvency. All this could give the central bank an excuse to stop the BoG providing emergency liquidity assistance to its lenders—which is currently the only safety net they have after the ECB stopped acting as a lender of last resort itself last week.

Tsipras said he wanted to secure a “bridge programme” with the euro zone while he negotiates a new deal. But his plans are a non-starter. The prime minister must realise that, without new sources of funds, his government could go bust next month. He must also know that there is a risk that deposit flight will accelerate and he will need to impose capital controls.

So is Tsipras crazy? Perhaps not. Opinion polls show over 70% of the population support a confrontational approach with the euro zone. The premier may have calculated that, if capital controls are imposed, he can ramp up nationalistic fever and blame the ensuing turmoil on austerity freaks in Germany and the ECB. Tsipras may therefore already be operating on a Plan B which envisages persuading the Greek people to take the country out of the single currency—even though over 70% of them also want to stay in it.

It is vital that the euro zone remains fair and cool-headed. It is not in its interest that Greece quits the euro. On the other hand, it cannot just agree to give Tsipras the bridge financing he wants on the terms he proposes. The least bad approach is to avoid giving Tsipras ammunition with which to further stoke national pride and wait for the financial realities to bite. If and when the Greek people can no longer get cash from their bank accounts, the current mood of euphoria may vanish and some compromise may be possible.

Then again, this may well not be possible and Greece may have no option but to bring back the drachma. The euro zone needs to prepare for the worst.

By Hugo Dixon

The author is Editor at-large, Reuters News

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