To sell while you are crumbling is too late
Twelve hours ago, at midnight Prague Summer Time, Greece became the first country that defaulted to the IMF among the countries that were widely considered developed at the moment of the default. I have been 90% sure that this event was unavoidable at least since June 5th or so. People who claimed that the European politicians "wouldn't allow" something like that have been shown spectacularly wrong.
Some EU politicians may religiously worship the memes about the integrated Europe. But these politicians have neither the absolute power nor the bottomless wallet. They face many people – including important people – whose thinking is more realistic. Even more importantly, they face the laws of physics. The convergence of Greece towards the collision with the default was as guaranteed as the implications of the laws of gravity. People just won't pay €1.6 billion for free – and that was the only way how Tsipras and comrades wanted the money to be paid. A few cheesy clichés about Europe's unity won't make anyone throw €1.6 billion into a black hole that has been known to be black for 5 years or so.
With the hindsight, the strategies seem clear. Tsipras and comrades were convinced – much like some blinded Euroskeptics – that the creditors couldn't possibly allow an EU country to default. So they were convinced that all the disagreements with Syriza's policies were just soft tricks that would go away when the deadline approaches. The Europeans would get terrified and keep Greece above the water at all costs. That was the main assumption of Syriza's negotiators at every moment of the last 5 months – and it was the "clever" assumption that their election campaign was built upon half a year ago, too.
Tsipras himself must have believed this dogma himself. He believed it so much that even yesterday around 6 pm, he decided to make new proposals. The idea was that as soon as he makes a telephone call, all of the important people and Parliaments in Europe would surely spend the remaining 6 hours up to the midnight by doing everything they can to save the Greek and Syriza "jewels". Well, surprisingly for some infinitely narcissist individuals, they didn't.
Tsipras and comrades surely don't lack courage – or what's the right word for the characteristic that is common among suicide bombers. As a young anti-capitalist activist, Tsipras was trained and formed by physical battles with policemen who were defending the rule of law – and capitalism (pictures of his activities at the 2000 G8 Summit in Italy recently surfaced). But as they were forced to learn hours ago, courage isn't enough to win.
Their assumption was that all the European leaders, all the ladies and especially gentlemen in the IMF, ECB, Eurozone countries etc., were just cowardly sissies, people who have never wrestled with a capitalist cop or any other cop, for that matter. Christine Lagarde might be the only one who has some balls – but she would be too isolated. So they can't possibly take the risk! Tsipras, Varoufakis, and others were blinded by the illusion of Greece's (and their own) importance.
Don't get me wrong: Tsipras and comrades were right about a part of this claim that almost all the politicians and bankers are sissies and most of them are more or less cowards. Another majority of them has no spine. But those who still have some spine, courage, and common sense on the side of creditors weren't negligible. More importantly, Greece is simply not as important as they thought. The European mechanisms protecting the financial system became rather powerful, too. The ECB as well as its critics have gotten used to various new tools to fight any contagion – like the quantitative easing. But there wasn't any good reason to expect contagion, anyway.
After the default, the Sun rose and things look just like they did yesterday. Stocks went up already early in the morning. To a large extent, this non-event atmosphere exists in Greece, too. Greece has defaulted, its stock market continues to be closed, and the capital controls are in place. But that's it. The country hasn't sunk under the ocean yet. Almost all the people who were alive yesterday are alive today, too.
What the default changes are the medium-term and long-term abilities of the government to achieve something. Even though tons of crazy people – including TRF commenters – would love to think so, the default doesn't eliminate the debt. The IMF web pages will eventually confirm that Greece has joined Somalia, Sudan, and Zimbabwe in the "arrears" – which is the IMF's euphemism for "default".
(Greece may also be isolated or expelled from the IMF – an organization whose self-confidence was seriously hurt by the default as well, more so than its financial condition. The only nominally civilized country previously expelled from the IMF was Czechoslovakia in 1954. We were expelled just because our communist leaders didn't provide the IMF with some documents. No, thousands of people freshly executed for their negative attitude to communism weren't a problem: the IMF is doing business, not politics, and it's probably right.)
But again, "default" doesn't mean "disappearance of debt". It just means that the country has already failed, became officially insolvent, so irregular and extraordinary (perhaps harsher) methods have to be exploited after the deadline to get the money from the debtor. "Arrears" ("delays") may be a euphemism for "bankruptcy" but on the other hand, it much more unambiguously conveys the point that the debt hasn't gone away. While for the IMF, Greece has already defaulted, the rating agencies ignore the debt to similar "institutional lenders". But once Greece defaults to the private ones, the rating agencies will change the status of Greece to D, default. All Greek bonds will become junk which can't be used as collateral or simply as assets in conventional "serious" institutions.
Even before that occurs, the international and European institutions – and all potential new lenders – are deducing consequences out of the IMF default, despite the continued non-default C-ratings. The IMF can't send another penny to Greece; the default made it absolutely forbidden according to the Fund's rules. This actually reduces the potential for any aid to Greece because many others in Europe (including Merkel) have said that they wouldn't start a salvation project without the IMF. Some of them may change their mind but it is not quite trivial because there indeed exist very good reasons to think that the salvation of this magnitude without any support from the IMF – the world's main organization that knows something about the financial salvation of countries – is just crazy.
Also, the IMF default means that Greece is no longer eligible for a penny from the EFSF (eurowall, a temporary bailout fund collected from the Eurozone countries' money), the program that coincidentally ended at the same moment when Greece defaulted. It's more serious than that: the people managing the EFSF now have the right, according to the laws establishing the EFSF, to demand the immediate repayment of Greece's €124 billion debt to the EFSF. No, no one actually expects that Greece could pay this money. And it is even unlikely that the immediate repayment will be demanded – because the EFSF people probably are sissies, after all. But it may happen and all these rules are only meant to emphasize that a country defaulting to the IMF is in deep šit, indeed.
And I don't have to explain to you that commercial lenders won't lend money to Greece after the IMF default, regardless of the official agencies' rating. You don't want to lend money to a defaulted entity because you may expect to only be repaid after the debts in arrears are compensated – and already that seems extremely difficult in the wake of the default.
Even though bankrupt countries don't suffer as much as physical persons who default (although I surely think that they should), the logic should be analogous and to a large extent, it is analogous. The creditors have tons of documents in their hands with which they may make the life of the Greek government unlivable. Varoufakis' recent threat that he would sue the Eurozone if Greece is expelled (the expulsion isn't described anywhere in the EU laws that assumed the EU and Eurozone to be irreversible) is amusing, indeed. If the courts began to analyze which laws have been violated, the Greek violations would be enough to hang all Syriza officials and their families. Moreover, no one really needs to expel Greece from the Eurozone. His life may become even more unlivable within the Eurozone. If he were constrained by the condition that they only use the euros, their life would be much harder than if they could print and use a new currency. Please, feel free to stay in the Eurozone but don't expect to own too many euros. ;-)
At the same moment, the increases of the ECB's ELA program for the Greek banks have been stopped and the limit has been almost depleted. Unless the Greek government builds its financial system and a new currency from scratch, the existing system may only continue when some deal emerges that will allow the ECB to increase the limits. Without such increases, Greece simply can't reopen its banks or lift the capital controls. Once it would do so, the commercial banks would quickly run out of cash and immediately collapse. It's easy to introduce capital controls but it's harder to lift them. The Slovak finance minister Peter Kažimír argues that at least when Greeks vote "No" on Sunday, their banks will never reopen in the euros again. (A person who has substantial funds in the bank would have to be mad to vote "No" – but I still expect most Greeks to vote "No".)
Now, in Czechoslovakia, we were extremely efficient in establishing new currencies. The January 1993 Velvet Divorce led to the need to split the currencies in about 5 weeks – because Slovaks were speculatively moving their cash to the Czech banks, (ultimately correctly) assuming that the currencies may be split and the Czechoslovak crown left in a Czech bank may turn out to be more valuable than its counterpart in a Slovak bank (the difference was ultimately 20-30 percent only, much less than many people expected). To defend the liquidity in the Slovak banks, the expectation of a possible split led to the need for this expectation to become the reality; the split had to be made, indeed (a self-fulfilling prophesy of a sort, but the reasons why it existed are pretty trivial). The transition was okayed during one session of the Parliament and completed within a few days. Czech or Slovak stamps were glued to all the banknotes to turn the soon-to-be-defunct Czechoslovak banknotes to either the Czech ones or the Slovak ones. Only a few months later, the two countries replaced the stamped Czechoslovak banknotes by brand new banknotes (and coins).
We were good at it and the transition was flawless for numerous reasons. First, and I think it's the most important thing, there was a good will. At that moment, Czechs and Slovaks – especially their political representatives – were on the same frequency and wanted the split and wanted it to be smooth. (New countries' prime ministers) Klaus and Mečiar could increase their political prestige by such a successful transition and they knew it. At least one side of the Greco-European negotiations (and sometimes both!) seemed like it wanted to create as many problems as possible. But our Czech and Slovak leaders simply wanted to start from scratch, do it right, and be appreciated for the smoothness – and they just did it. The desire for smoothness made the leaders more generous – already during the dissolution of Czechoslovakia. Whenever possible, the assets were divided according to the territory, perhaps with a few exceptions, and non-territorial assets were divided in the 2-to-1 ratio, a simple algorithm, indeed.
Second, we have had quite some experience with similar currency transitions. Dissolution of Austria-Hungary, declaration of the Protectorate of Bohemia and Moravia and the independent clerofascist Slovak State, reunification of Czechoslovakia after the war, currency reforms in the 1950s, and so on. People simply had an idea what was needed. (But even after 1918, the first separation of the currency – away from the other successor states of Austria-Hungary – was done by our then finance minister Alois Rašín in a nearly flawless way so some people simply don't need precedents.) Greece has no experience like that. Its only transition of currencies was their Eurozone entry – and it was largely organized by non-Greeks.
Third, the stamps had been printed since late Summer 1992, half a year before the currency split – the possibility that they would be needed was appreciated right after the "non-uniform" Summer 1992 elections. A British company was hired to do those things for the Czech stamped banknotes and they were physically printed somewhere in Latin America. The technology was ready. Greece isn't capable of printing banknotes or minting coins right now. My guess is that they don't actually have the stamps ready to separate the euros (let alone the new banknotes) – and nothing of the sort.
Fourth, there weren't almost any complicated financial instruments in Czechoslovakia of late 1992 that would require some special attention.
At any rate, I think it's clear that the Syriza bosses believed that Europe would blink. It didn't. And it's also clear that they're completely unprepared to build a new financial system. It has just never been a part of their strategy. In that sense, they spectacularly differ from the Slovak politician who had been thinking about some kind of independent at least for 2 years (even though most of the "clever algorithms" how to divide were masterminded by Czechs). For months, they have been saying that their membership in the Eurozone can't even be debated, and so on. This means that they haven't even thought how they could realize the project of a new currency and banks using it etc. As a chief economist of a big bank said, Greeks can't even organize barbecue, let alone a new currency. (See a July 2nd Varoufakis' admission that they can't print drachmas.) So if they want to open the banks and the economy again, without the near certainty that everything collapses completely and they have no idea what to do with it, they have to agree on a deal, after all.
Today, about 11 hours after the default, Tsipras sent a letter to the creditors saying that he's ready to accept their conditions from last Friday although he would like to soften a few relative details.
This is quite a transformation. Just a few hours ago, Tsipras would be a loud advocate of the referendum (which, by the way, falls short of international standards according to the Council of Europe) – and the "No" vote in the referendum (disagreement with any "austerity"). But I think that with the hindsight, he has primarily used the referendum – and his openly declared intent to support the "No" vote – to increase the pressure on the creditors further. He must have known that – but he didn't – the pressure was simply not enough, not even with this "boost". The Greek default and/or Grexit are simply no longer taboos, devils that make everyone šit into his pants. Lots of Europeans – and even very important Europeans – openly favor this development, a development that Tsipras and comrades are unprepared for.
If Tsipras et al. were playing a game, poker or something like that, they would be the more courageous or risky players in the game. But they would also be those who lose as much as possible. For quite some time – at least days and probably weeks if not months – it was simply clear that the creditors would not blink before the IMF deadline. They were ready for it. He should have blinked first because the default makes his position vastly weaker. His "courage" made him less likely to blink before the Europeans do. But the Europeans had a more important advantage: whether they have balls or not, the default really isn't a problem for them! That's why they didn't blink. ;-)
One may imagine that Tsipras and Varoufakis were trading stocks. Twelve hours ago, they just allowed the "stock of Greece" to dramatically drop. And now they realize that they need some money to survive so they have to sell the stocks at a hugely depressed price, after all. This is obviously a recipe to create a maximum loss! I think that as a game theorist, Varoufakis and comrades suck as much as you can get. University of Athens clearly employs people – such as game theorists – who are not up to their job at all. Varoufakis as a game theorist is just another example of a public servant who sucks the Greek public money and doesn't do an appropriate job in exchange.
So now, the Syriza folks want to agree on a compromise that would have been potentially realistic last Friday, a slightly softened proposal by the creditors from that day. But Greece of July 1st isn't the same country as Greece of June 26th. Greece of July 1st is a country in default, a country with capital controls, a country whose financial credit has been almost irreversibly damaged by the official default status. Much of the economy has stopped completely – it's hard to do business if you can't use banking and if suppliers demand cash (which you don't possess) because they can't trust you that you will pay them later. In a week, the shortages of goods will become impossible to overlook. Hospitals may run out of important stuff earlier than that. The simplest reason why the two parties can't sign to the Friday proposal now is that the proposal was an extension of the EFSF program. But the EFSF program is over. It was cut. So it just can't be extended! That's also a simple reason why the question in the planned Sunday referendum is completely meaningless. No such offer is on the table now. See Merkel via The New York Times if you are suspicious about this obvious claim of mine.
Some damages that the default and capital controls have done to the economy are already irreversible. Some problems may be reversed. But it seems clear to me that the expected tax revenues etc. after this week of capital controls (Merkel refuses to negotiate before the referendum: will Tsipras cancel it?) and after the default will inevitably be lower. So any realistic agreement has to reduce the spending much more than the previous proposals did, too.
My feeling is that Tsipras' letter is a pretty general admission of these Bolsheviks' loss, a surrender, an indication that their stubborn attitude is over. And they want a compromise they should have wanted some time ago. But due to the reduced potential of Greece to produce things, this compromise just isn't enough for the present. I hope – and I actually think – that the Eurozone finance ministers (and German and other lawmakers and ministers whose views I just read) realize this point as well as I do. So instead of softening the creditors' proposals, Tsipras and comrades should be ready for harsher conditions if he wants to save his life. He hasn't crumbled enough yet. Tougher conditions are the only ones that reasonable politicians and economists in Europe could endorse now.
Folks outside Greece were shocked by the invention of the referendum because it was a thing they (and I) didn't expect at that late moment. However, after a few days, it seems that it actually makes the life of the European politicians more convenient. First, they don't have to negotiate in this whole week: the referendum is a good excuse that is intensely exploited to justify the break. Second, if the outcome of the referendum is "Yes", it's likely that Tsipras and probably others will resign and leave politics and the most obnoxious possible negotiating partners will be replaced by someone else in the hypothetical future negotiations (Tsipras has vaguely promised resignation after a "Yes" result). Third, if the result is "No", Greece may be expelled from the Eurozone and probably the EU while this step may be interpreted as the Greeks' own decision. No one outside Greece will really be blamed for that – the people wanted it. Politicians' fear that "they will be blamed for Grexit" has contributed to the big ones' shortage of steps that would clean the situation in this way – but this will change after the "No" outcome and I think that "No" is more likely than "Yes".