Yesterday was one of speculation and false hopes, rumour and wishful thinking. It ended without any actual change. The referendum will proceed on Sunday and the Tsipras government urges Greeks to vote No. The IMF and the Euro Group declared that there could be no more talks until after the referendum and that existing arrangements had ‘expired’. Yet there appeared to be cracks in this facade of solidarity including two clips on TV. One was of Merkel ruling out any agreement about anything until after the referendum; the other was of the French president saying that it was imperative that an agreement was reached before the referendum.
Meanwhile nobody is clear what will happen when this referendum is over. If the vote is No, Tsipras thinks he can negotiate a new deal, but that is far from certain, and if he cannot what happens then? And if it Yes, yes to what? There is no deal on offer. So the whole process starts again with absolutely no evidence to indicate that the crisis will be other than ongoing, seemingly for ever. The main reason for this is that there is no sound economic basis underpinning any of the plans. There are only two solutions. Both recognise Greece is bust.
The first, which involves Greece staying in the Euro, requires action by the ECB and a haircut down to grade one for Greece’s creditors. This will involve existing loans either being reduced to 25% of face value or extended to over a hundred and fifty years at peppercorn interest, which would have the same effect. The ECB would then have to print enough Euros to reboot the Greek economy and keep it within Euroland. Germany will have to recognise it has no option but to agree to the printing and help rescue any busted eurozone banks. The resultant devaluation of the Euro will help kick start the moribund Euroland economy. The devaluation will be short lived. The IMF is involved in this rescue only as a creditor with losses. It should never have been engage in the first place on an internal eurozone problem.
The second involves Greece defaulting on everything and going back to the drachma. This will involve bigger losses to creditors and would require the IMF, not the eurozone, to fund the re-boot of the Greek financial system.
Neither of these solutions is on the table. Lending more money to Greece to prop up obligations it cannot meet and thus increase its indebtedness is utterly pointless and will not work in the future any more than it has done in the last five years. What it will do is guarantee a big bang down the line which will sink the whole euro project.