Greece runs out of cash as debt crisis enters final act

Greece will have a referendum seven days from now. Its people will decide, via vote, whether or not to accept the terms of an agreement that the institutions of the European Union haven’t actually agreed on. The absurdity of the situation is compounded as, all the while, euro-denominated deposits are flying out of the country. Greece might well default on a major payment to the IMF on Tuesday. The ECB can decide to let the Greek banks collapse, or impose capital controls, stop the outflow of money and cut the country off from the rest of the world financially.

The situation for the Greek people, to put it mildly, is pretty bleak. Ineptitude on both sides has brought us to this point. The troika have not recognised the fundamental failure of their 2012 bailout programme, which doubled Greek national debt levels, broke the economy in half, doubled unemployment, and bailed out European banks. The troika’s failure to acknowledge the reality that Greece can never, ever repay its loans lies at the heart of the current impasse.


Europe’s creditor nations are never getting their money back. Europe’s banks, however, have already been made whole. I perceive a certain smugness when I hear that Europe’s banking system is insulated from any Greek default or credit event. The same kind of smugness was in evidence when Lehman Brothers was let go in 2008. Nobody knows what will happen, and Europe’s leaders are foolish to think that they understand the second- and third-order effects of a crisis like this. Their only real option is to impose capital controls on the banks, to stop money running out of the country.

First, we need to think about why Greece would want to call a referendum so close to their current bailout ending.

The logic of the decision from Greek prime minister Alexis Tsipras’ side is clear. He was given a four-day ultimatum to railroad a bad deal for Greece (from his perspective) through parliament. It is unclear whether he would have had the votes to actually do this. Only ten of his hard-left Syriza MPs would have to say ‘no’ to collapse the government. Then Tsipras would have had to bargain with centre-right and hard-right parties, essentially arguing publicly for the kind of austerity policies that he was elected to try to stop.

The sequencing of decisions also matters for the Greek government. The referendum allows it to retain power while the decision to impose austerity (or not) is made. The government will campaign for a No vote, forcing the centre-right and centre parties to campaign and vote for austerity, basically.

In the likely event of a No vote, Tspiras can return to Brussels armed with a mandate from 11 million people not to accept more austerity. With a Yes vote under his belt, Tsipras can either resign his government, or implement the austerity measures with a relatively popular backing. This last outcome is not likely at all. It is worth remembering that, during the 2007 and 2008 crisis, Iceland had a referendum on its crisis. The popular vote went massively against taking on any further responsibilities, and led directly to capital controls, imposed by the IMF but with the direction and support of the Icelandic government.

A key problem is whether the Greek authorities can actually implement capital controls in practice. I have no confidence that they can.

The referendum is clearly designed to be a part of the negotiations between Greece and the troika. As a gambit, it may fail. A referendum was threatened by a previous prime minister in 2011, and Europe’s leaders forced him to back down and resign. Now, after its experience with Cyprus, Europe’s leaders think they know how to contain an eventual Greek banking collapse.

Greek banks are leaking deposits on an hourly basis. The ECB has to allow the Greek Central Bank to issue money to balance the banks’ books on a daily basis. This emergency liquidity assistance acts as a kind of leash on the ability of the Greek banks to function. The legal basis for the ECB’s continued support – the bailout programme Greece is involved in – disappears if the sovereign defaults on Tuesday. They could make Greek banks insolvent on Monday afternoon. So Greece’s banks may simply close indefinitely on Monday, stay open and go wallop on Tuesday, or a combination of the two.

For the average Greek citizen, the level of uncertainty must be unbearable.

Remember, too, that the Greek people are firmly against exiting the Euro. A Grexit means more unemployment, increasing poverty, rationing of basic commodities, a massive devaluation, rising inflation and the imposition of further capital controls. All this compounding the hardship of a population who have previously experienced a 25 per cent drop in their living standards.

The wording of the proposed referendum looks horrendously complicated, asking the Greek people to allow the government to implement the deal and consider a debt sustainability analysis. Really!

In Ireland, when people can’t understand the terms of a referendum, they say No. This wording does seem calculated to produce a No from the population. Who, in all fairness, would vote for ‘more austerity’?

There is no legal mechanism to exit the euro. In his address to the nation, Tsipras explicitly referred to Greece remaining within the euro and the European Union. He said: “Greece is, and will remain, an indispensable part of Europe; and Europe an indispensable part of Greece.”

Best of luck with that, Alexis.

In their reaction to the Greek authorities announcing the referendum, the institutions of the European Union may well frame this as an “in or out” referendum, and therefore force the Greek people, effectively, to choose between austerity and the euro.

The Greek economy has contracted for seven years via a process of national immiseration through continual austerity, driving much Greek economic activity into the grey and black markets – and thus killing any chance of levying the taxes needed to escape the budget deficits which require ever more sovereign borrowing.

Austerity, imposed by the troika, largely in order to save Europe’s banks, has created an unsustainable debt spiral in Greece. Voting yes or no on Thursday won’t solve that problem.