Huge Win for Greece, Varoufakis Sacked, Troika Unlikely to be Placated

Greek Prime Minister Alexis Tsipras' first move following the landslide anti-austerity "Oxi" vote in yesterday's referendum was to toss his finance minister and chief troika critic, Yanis Varoufakis, on the pyre. Varoufakis announced his resignation today with the blog post, "Minister No More":

Soon after the announcement of the referendum results, I was made aware of a certain preference by some Eurogroup participants, and assorted ‘partners’, for my… ‘absence’ from its meetings; an idea that the Prime Minister judged to be potentially helpful to him in reaching an agreement. For this reason I am leaving the Ministry of Finance today. 

I consider it my duty to help Alexis Tsipras exploit, as he sees fit, the capital that the Greek people granted us through yesterday’s referendum. 

And I shall wear the creditors’ loathing with pride. 

We of the Left know how to act collectively with no care for the privileges of office. I shall support fully Prime Minister Tsipras, the new Minister of Finance, and our government. 

The superhuman effort to honour the brave people of Greece, and the famous OXI (NO) that they granted to democrats the world over, is just beginning.

There is no indication at this point that the eurozone power brokers are feeling any change of heart after a super-majority of Greeks rejected their last proposal. Jack Ewing reports from the European Central Bank headquarters in Frankfurt that there is a wait-and-see attitude on Greece's access to emergency liquidity assistance (ELA):

The no vote by Greeks on Sunday makes it even more difficult for the European Central Bank to continue propping up Greece’s commercial banks, whose solvency is closely linked to that of the country’s government. 

But the central bank has so far avoided taking action that could force Greece out of the eurozone, a possible outcome if the banks fail. Without a banking system serving as a conduit for euros and a platform for transactions, Greece might have little choice but to begin printing its own currency.

“Pressure has increased further for the E.C.B. to revoke Greek banks’ access to central bank liquidity,” said Mujtaba Rahman, the Europe director for the Eurasia Group, a political risk consulting firm. “Still, the E.C.B. is very likely to keep its liquidity lifeline open for the time being.”

While the central bank probably will not cut off credit to the Greek banks on Monday, it is also unlikely to increase the amount available to them from its current level of 89 billion euros, or about $99 billion. The 25 members of the Governing Council will not want to increase the central bank’s exposure to Greece until there is tangible progress toward an accord with eurozone creditors and with the International Monetary Fund.

Without an increase in credit, Greek banks are in imminent danger of running out of cash to dispense to depositors. They are unlikely to open tomorrow, despite promises to the contrary by Athens.

“The Greek no puts the European Central Bank in a most difficult position,” Holger Schmieding, chief economist at Berenberg, a German bank, said in a note to clients. “We look for the E.C.B. to tread very cautiously, though, perhaps even seeing to it that small amounts of euro cash could still be withdrawn from Greek cash machines for a while until the political outlook becomes clearer.”

In other words, the historic "Oxi" vote by the Greek people means nothing to ECB apparatchiks. This attitude is also prevalent in Brussels where James Kanter quotes European Commission VP Valdis Dombrovskis saying "Oxi" will make things worse for Greece:

“The commission is ready to continue its work with Greece,” Mr. Dombrovskis told a daily news conference in Brussels. “But to be clear, the commission cannot negotiate a new program without a mandate from the Eurogroup.” 

Mr. Dombrovskis was referring to the name of the group of finance ministers from countries that use the euro.

The hurdles to a formal resumption of talks, including any official decision by the Eurogroup to begin negotiations on Greece’s third international bailout in five years, were high, Mr. Dombrovskis warned.

“The ‘no’ result unfortunately widens the gap between Greece and other eurozone countries,” he said. 

“There is no easy way out of this crisis,” he added. “Too much time and too many opportunities have been lost.”

Once again, to the eurozone power elite the "Oxi" vote means nothing; in fact, worse than nothing. The democratic referendum, we are told, has raised the costs of the any new bailout deal by tens of billions of euros.

What the "Oxi" vote reveals is the weakness of the "big lie." Greek voters saw clearly what was happening: Banks were shut because the European Central Bank capped ELA when Tsipras called the referendum. The ECB did this in an attempt to shock Greeks and stampede them in the direction of a Yes vote. It failed stupendously. Now, as Krugman outlines in his column, "Ending Greece’s Bleeding," for the ECB to increase ELA would be to acknowledge that the cap on lending was a political intervention meant to topple Greece's Syriza-led government:

The most immediate question involves Greek banks. In advance of the referendum, the European Central Bank cut off their access to additional funds, helping to precipitate panic and force the government to impose a bank holiday and capital controls. The central bank now faces an awkward choice: if it resumes normal financing it will as much as admit that the previous freeze was political, but if it doesn’t it will effectively force Greece into introducing a new currency. 

Specifically, if the money doesn’t start flowing from Frankfurt (the headquarters of the central bank), Greece will have no choice but to start paying wages and pensions with i.o.u.s, which will de facto be a parallel currency — and which might soon turn into the new drachma.

But the big lie must be protected. That is all neoliberalism is at this point. Krugman is not sanguine about the possibility of a new debt deal emerging quickly; and without this, Krugman sees no better alternative for Greece than abandoning the euro:

In the failed negotiations that led up to Sunday’s referendum, the central sticking point was Greece’s demand for permanent debt relief, to remove the cloud hanging over its economy. The troika — the institutions representing creditor interests — refused, even though we now know that one member of the troika, the International Monetary Fund, had concluded independently that Greece’s debt cannot be paid. But will they reconsider now that the attempt to drive the governing leftist coalition from office has failed?

I have no idea — and in any case there is now a strong argument that Greek exit from the euro is the best of bad options.

Of course, Greece no longer has its own currency, and many analysts used to claim that adopting the euro was an irreversible move — after all, any hint of euro exit would set off devastating bank runs and a financial crisis. But at this point that financial crisis has already happened, so that the biggest costs of euro exit have been paid. Why, then, not go for the benefits? 

Would Greek exit from the euro work as well as Iceland’s highly successful devaluation in 2008-09, or Argentina’s abandonment of its one-peso-one-dollar policy in 2001-02? Maybe not — but consider the alternatives. Unless Greece receives really major debt relief, and possibly even then, leaving the euro offers the only plausible escape route from its endless economic nightmare.

And let’s be clear: if Greece ends up leaving the euro, it won’t mean that the Greeks are bad Europeans. Greece’s debt problem reflected irresponsible lending as well as irresponsible borrowing, and in any case the Greeks have paid for their government’s sins many times over. If they can’t make a go of Europe’s common currency, it’s because that common currency offers no respite for countries in trouble. The important thing now is to do whatever it takes to end the bleeding.

Basically we are back to where we were when negotiations first started between Greece and the troika. Absent significant debt write-offs there appears to be no rational alternative to a Grexit.

But a Grexit doesn't appear to be Tsipras' goal; axing Varoufakis is proof of that (though the finance minister didn't seem too broken up about it; at the end of the day, a scholar prefers the quiet of the cloister). Why the troika doesn't grab at the offer Tsipras made last Wednesday after Greece failed to make its repayment to the IMF and be done with the crisis can only be explained by a perception in Brussels, Berlin, and other European capitals (not to mention Washington D.C.) that protecting the big lie of neoliberalism -- at all costs -- is paramount, and this demands that a leftist party like Syriza must go.