It ought to be no surprise that Greece has have voted so emphatically against its creditors’ latest word on conditional aid: the failure of the policy so far, and the social disaster it has caused, are well known; the behavior of the European creditors in the last week probably hindered their cause more than helped it; the IMF’s strong call for debt restructuring certainly bolstered the government’s position; and, as may now become clear, the balance of of power in any bankruptcy negotiation really can shift in the debtor’s favor the minute that its debts are realized as too large.
And yet the referendum result–a crushing 61.3%-38.7% vote against new austerity and reform measures, is just that–a big surprise. The polls suggested a very close vote. Most people outside Greece saw the vote in the terms that non-Greeks had framed it: whether or not to abandon the euro. Instead, it seems Greeks believed the version their Prime Minister had sold them: it was just a negotiating tactic that would call the Eurozone’s bluff and force it into relieving Greece’s debts. It seems that Alexis Tsipras successfully deflected blame for the current situation onto ‘the foreigners’, despite a host of data that trace a clear line back to the day his government took power. But ultimately, the size of the winning margin makes nuanced analysis superfluous: Greeks have had enough and want real change so badly that they’ll take a huge gamble to get it.
Sadly for them, they are unlikely to get the change they want–a radical restructuring of their debt without the loss of their privileges to print and spend euros. They’re not even likely to get the second-best alternative: a bold, modernising government that can drag the country into the modern age with the help of a new currency. The rest of the Eurozone is so set against Greece that the country’s being forced out of the currency union is now by far the likeliest outcome. By contrast, a surrender to Greek demands at this point would only prove that the Greek tail is waving the Eurozone dog, with serious consequences for its long-term credibility.
With virtually no euro cash reserves left, it’s clear that Greece’s banks cannot honor depositors’ claims of over €120 billion unless the European Central Bank relaxes the credit straitjacket. Finance Minister Yanis Varoufakis told the U.K.’s Daily Telegraph that: “If necessary, we will issue parallel liquidity and California-style IOU’s, in an electronic form. We should have done it a week ago.” (Varoufakis’ critics will note there was no talk of that sort before the polls had already closed.)
California had issued IOUs to bridge its budget gap in 2009 (after the collapse of Lehman Brothers froze markets), and again in 2012. The ECB, in its role as the banks’ supervisor, is likely to take a dim view of giving short-term loans against the promise of a government that is now obviously bankrupt. It would have every right to call in the €89 billion in emergency loans to Greek banks against government collateral, and only its duty to preserve financial stability argues against doing so.
As before, the ECB is unlikely to precipitate a crisis without explicit political cover. For that, it needs the conclusions of yet another group of Eurozone finance ministers on Tuesday (a meeting that will in turn take its cue from a meeting Monday between Germany’s Angela Merkel and France’s Francois Hollande). Merkel, the great political survivor, is under the most domestic pressure to cut the Greeks adrift, but others, such as the governments of Spain and Ireland, are also bitterly opposed to any policy that would make them look like patsies for accepting harsh austerity medicine lying down for three years. Whether or not the Eurozone allows the ECB to trigger a crisis depends on how much damage they think they will do themselves by doing so. Are the new institutional firebreaks strong enough to stop contagion? Have we done enough to deter people speculating against us in the first place?
All of last week, it seemed that Greece was bluffing. Sunday’s stunning vote result is a last-minute buy-in that that allows it to raise the stakes just one more time before the final showdown. But it is still the Eurozone that has the better cards, and the bigger stack. Unless it loses its nerve completely, this game of poker is still going to end only one way. The biggest question is how far Berlin and others will go to keep Greece politically stable as it leaves the Eurozone.