Call it game theory gone horribly chaos theory.
It all started with a report by the Telegraph’s Ambrose Evans-Pritchard, whose release of on the record comments by Yanis Varoufakis (which we noted was rather surprising) that Greece was contemplating a parallel currency and potentially nationalizing Greek banks over the weekend, was supposedly the catalyst that got the Greek finmin fired. As a reminder, this is what Varoufakis told AEP on Sunday night: “If necessary… issue parallel liquidity and California-style IOU’s, in an electronic form. We should have done it a week ago.” And this is what the WSJ said on Monday morning:
… the premier decided to act after Mr. Varoufakis told a U.K. newspaper late Sunday that Greece might introduce a parallel currency and electronic IOUs similar to those issued previously in California. Mr. Varoufakis quickly backtracked on his comments to the Daily Telegraph,but his prime minister had had enough, the people familiar with the matter say.
That was the first indication that the wheels had officially come off the Greek wagon.
Moments ago, we got confirmation of just that, when in another surprising twist it was again the Telegraph’s Evans-Pritchard who reported that the Greek prime minister who decisively and unexpectedly pushed for a referendum on the last weekend of June, “never expected to win Sunday’s referendum on EMU bail-out terms, let alone to preside over a blazing national revolt against foreign control.”
He got just that, and in a landslide vote at that even though “he called the snap vote with the expectation – and intention – of losing it.”
Also according to the Telegraph, “the plan was to put up a good fight, accept honourable defeat, and hand over the keys of the Maximos Mansion, leaving it to others to implement the June 25th “ultimatum” and suffer the opprobrium.”
He had good reason: according to another Varoufakis quote provided by AEP, “[the Troika] just didn’t want us to sign. They had already decided to push us out.” In other words, as we speculated in mid-June, the only question was who gets stuck with the blame, and when Tsipras called the referendum, he made it quite easy for Europe; it was even easier when Greece collectively voted “Oxi” to a referendum spun in Europe as one whether or not to remain in the Eurozone.
There is more: with Tsipras having already checked out it was a case of “after me, the flood”
This ultimatum came as shock to the Greek cabinet. They thought they were on the cusp of a deal, bad though it was. Mr Tsipras had already made the decision to acquiesce to austerity demands, recognizing that Syriza had failed to bring about a debtors’ cartel of southern EMU states and had seriously misjudged the mood across the eurozone.
But it is what happened next that took everyone by surprise: “Syriza called the referendum. To their consternation, they won, igniting the great Greek revolt of 2015, the moment when the people finally issued a primal scream, daubed their war paint, and formed the hoplite phalanx.”
Suddenly the stakes are even higher for Tsipras, who is “now trapped by his success.” According to Costas Lapavitsas, a Syriza MP, “the referendum has its own dynamic. People will revolt if he comes back from Brussels with a shoddy compromise.”
Ironically, that is precisely why the market soared today after it tumbled early in the morning, because it appeared that the Greek finmin was doing just: accepting a shoddy compromise. Of course, it wouldn’t be the first time: the Greeks had come home with “compromise” deals on many previous occasions only to have Syriza tear them apart. And this time the stakes are higher not only for Tsipras but the entire party, which realizes it faces a mutiny by the people, mostly the young ones, those with little to lose, if some 60% of them voted against a deal “at any cost” just to see the government fall back to just such an outcome.
The Syriza MP Lapavitsas is correct when he says that “Tsipras doesn’t want to take the path of Grexit, but I think he realizes that this is now what lies straight ahead of him.”
In some ways Tsipras tried to backtrack: “The prime minister was reportedly told that the time had come to choose, either he should seize on the momentum of the 61pc landslide vote, and take the fight to the Eurogroup, or yield to the creditor demands – and give up the volatile Mr Varoufakis in the process as a token of good faith.”
What would happen if Tsipras did decide to stick it to Europe, launch a parallel currency, sack the legacy central banker and nationalize the insolvent banks? We already laid out the key points previously but here it is again:
They would “requisition” the Bank of Greece and sack the governor under emergency national laws. The estimated €17bn of reserves still stashed away in various branches of the central bank would be seized.
They would issue parallel liquidity and California-style IOUs denominated in euros to keep the banking system afloat, backed by an appeal to the European Court of Justice to throw the other side off balance, all the while asserting Greece’s full legal rights as a member of the eurozone. If the creditors forced Grexit, they – not Greece – would be acting illegally, with implications for tort contracts in London, New York, and even Frankfurt.
They would impose a haircut on €27bn of Greek bonds held by the ECB, and deemed ‘odious debt’ by some since the original purchases were undertaken by the ECB to save French and German banks, forestalling a market debt restructuring that would otherwise have have happened.
None of that happened, instead Greece is now in full chaos mode.
Events are now spinning out of control. The banks remain shut. The ECB has maintained its liquidity freeze, and through its inaction is asphyxiating the banking system.
Factories are shutting down across the country as stocks of raw materials run out and containers full of vitally-needed imports clog up Greek ports. Companies cannot pay their suppliers because external transfers are blocked. Private scrip currencies are starting to appear as firms retreat to semi-barter outside the banking system.
However, it is not just Greece which is sliding into total chaos – so is Europe itself, where the splits are becoming so obvious none other than the head of the German Institute for Economic Research said “What Is Happening Now Is A Defeat For Germany.”
The entire leadership of the eurozone warned before the referendum that a ‘No’ vote would lead to ejection from the euro, never supposing that they might have to face exactly this. Jean-Claude Juncker, the European Commission’s chief, had the wit to make light of his retreat. “We have to put our little egos, in my case a very large ego, away, and deal with situation we face,” he said.
France’s prime minister Manuel Valls said Grexit and the rupture of monetary union must be prevented as the highest strategic imperative. “We cannot let Greece leave the eurozone. Nobody can say today what the political consequences would be, what would be the reaction of the Greek people,” he said.
French leaders are working in concert with the White House. Washington is bringing its immense diplomatic power to bear, calling openly on the EU to put “Greece on a path toward debt sustainability” and sort out the festering problem once and for all.
The Franco-American push is backed by Italy’s Matteo Renzi, who said the eurozone has to go back to the drawing board and rethink its whole austerity doctrine after the democratic revolt in Greece. He too now backs debt relief for Greece.
However, as if oblivious to these terminal developments within her own union, Merkel is already pushing onward and discussing plans for humanitarian aide and balance of payments support for the drachma: if there was any clearer indication that the Eurozone has been an abject failure, it would be the treatment of one of its member states as a 3rd world African banana republic even before it formally withdrew from its quasi-prison.
Some within Syriza realize that it is all coming to an end, no matter if the can is kicked one more time (which it increasingly looks like it may be despite the referendum’s landslide vote):
Mr Lapavitsas said Europe’s own survival as civilisational force in the world is what is really at stake. “Europe has not show much wisdom over the last century. It launched two world wars and had to be saved by the Americans,” he said
“Now with the creation of monetary union it has acted with such foolishness, and created such a disaster, that it is putting the very union in doubt, and this time there will be no saviour. It is the last throw of the dice for Europe,” he said.
… and yet, in the very end, the Greek prime minister who bluffed and unexpectedly won, now appears willing to concede just about everything to Merkel. Because even if the Telegraph’s entire article is based purely on speculation, it doesn’t explain the easy with which Tsipras seems to have folded not only on implementing reform as part of the harsher deal proposed by Merkel, but his admission that further debt relief now appears unlikely:
- TSIPRAS PLEDGES GREEK REFORMS AS PART OF ANY AID DEAL
- TSIPRAS SAYS GREECE SUBMITTED PROPOSALS TODAY
- TSIPRAS SAID MORE RESTRAINED IN REQUESTING DEBT RELIEF
And from the president of the European Council:
.@atsipras committed to present a new request for a programme within the framework set by the ESM Treaty, incl. strict policy conditionality
— Donald Tusk (@eucopresident) July 7, 2015
Because in the end money talks, in this case €120 billion in hijacked unsecured liabilities known “deposits” and politicians walk. As for those millions of Greeks who gave Europe the symbolic middle finger on Sunday, their reaction when they just find out they were sold down the river once again will be all that matters.
Yet in the end, Varoufakis’ line may again be the most important one: “they had already decided to push us out.” If true, then as Juncker threatened earlier not only will the last day for the Greek government be Monday, but so will the last day for Greece in the Eurozone.