Alexis Tsipras won Greece’s referendum but gained nothing

The prime minister’s brinksmanship did too much damage to Greece’s financial system to justify the leverage he got

Angelos Tzortzinis/The New York Times/Redux

Former Greek finance minister Yanis Varoufakis. (Angelos Tzortzinis/The New York Times/Redux)

Yanis Varoufakis said he would quit as Greek finance minister if citizens voted “Yes” in Sunday’s referendum. Greeks voted “No” in large numbers. Varoufakis quit anyway.

The former Greek finance minister resigned in the aftermath of his government’s victory, another unexpected twist in Greek Prime Minister Alexis Tsipras’s unorthodox showdown with his country’s creditors over the terms of a new bailout.

It is entirely unclear at this moment whether Tsipras will get the money he seeks, or even whether his country has a future in the euro zone. He sprung on the Greek people a referendum on whether to accept the terms of an offer that had expired. European leaders cast the vote as a plebiscite on whether Greece would continue to use the euro. Tsipras rejected that interpretation, saying a “No” would give him a stronger hand in negotiations. More than 60% of voters decided to back their prime minister.

The fatalists were out in force Monday. Economists at Morgan Stanley, an investment bank, said they now were working on the expectation that Greece will exit the eurozone.

But that’s still not a given. The change at the finance ministry was an olive branch. Varoufakis, a self-described “erratic Marxist” economist, was loathed by other European finance ministers and a potential impediment to an agreement. In the aftermath of the referendum, Tsipras decided to present the head of his finance minister as a symbol that the Greek government was serious about negotiating in good faith.

“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,” Varoufakis wrote in a blog post. “And I shall wear the creditors’ loathing with pride.”

Tspiras will have to make more sacrifices. The initial response from German Chancellor Angel Merkel’s office was that there currently was no foundation on which to start a negotiation. Still, she was on her way to Paris Monday to consult French President Francois Hollande. Euro-area finance ministers were scheduled to meet Tuesday afternoon and leaders have set a summit for Tuesday evening. The Governing Council of the European Central Bank also will be talking. The ECB must decide to what extent it is willing to support Greek banks, which remained closed Monday. The ECB essentially is the only thing keeping the Greek banking system from collapse by meting out loans in return for collateral. Given the heightened risk of outright default, the ECB’s leaders may adjust their collateral demands.

Greek Prime Minister Alexis Tsipras (2nd L) arrives for a meeting of political party leaders at the Presidential Palace in Athens, Greece July 6, 2015. (Alkis Konstantinidis/Reuters)

Greek Prime Minister Alexis Tsipras (second from left) arrives for a meeting of political party leaders at the Presidential Palace in Athens, Greece July 6, 2015. (Alkis Konstantinidis/Reuters)

So it will be 48 hours before the situation becomes clear. The reason it would be a mistake to bet on exit is that a resolution remains in the best interest of both sides. The leaders of the euro area must reckon with the integrity of their currency, which would be weakened by setting a precedent for exit. And Tsipras will know that he risks plunging his country into a depression.

Tsipras’s victory on Sunday came at the expense of a functioning financial system. The failure of negotiations last week prompted a bank run. The government had no choice but to close banks to keep capital from fleeing the country. The government also limited ATM withdrawals to €60 per day.

No modern economy functions without ready access to credit and cash. Tsipras said Monday that reopening the banking system was his priority. That could be wishful thinking without the full support of the ECB and the promise of a new international rescue package. Without those, depositors will have every incentive to liberate euros while they still can. “History shows that it is relatively easy to shut down banks but always difficult to reopen them and normalize financial conditions,” Angel Ubide of the Peterson Institute for International Economics wrote last week.

Economists at RBC Capital Markets said Sunday that there was a significant risk that Tsipras would overplay his hand. That’s true, but pressure he will be under to restore credibility to the banking system could keep him in check.

The longer the financial system is effectively shut, the worse Greece’s economic malaise will become. Ubide observed that economic growth in Cyprus declined by more than 5% in the quarter after its government implemented capital controls. He reckons Greece’s economy now is condemned to the same fate, undermining Tsipras’s claim that the purpose of the referendum was to obtain a better deal from the creditors.

On the surface, it looks like Tspiras’s gambit was successful in that he got what he wanted. In reality, he has gained nothing. Even if he wins some concessions over the next couple of days, he will have done so by making the hole he trying to escape even deeper.

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