The claims before the referendum that a win for OXI would strengthen Greece’s negotiating position, lead to an agreement within 48 hours and to a re-opening of the banks have proven to be hollow. European leaders have in effect started a countdown to an inevitable Greek exit from the euro if there is no agreement on Sunday.
Angela Merkel has made it clear there will be no bridging arrangement to enable funds to be advanced to Greece over the summer, pending a longer-term deal. Instead, negotiations will be about a two-to-three year arrangement under which new conditional loans might be disbursed. Greece has until Thursday night to declare how it proposes to deal with the growing budgetary gap that has emerged in the last few months as a result of the latest slide in the economy, and how it intends to implement crucial governance and macroeconomic reforms. There will then be an unprecedented double summit on Sunday of eurozone leaders and of all 28 EU countries. The calling of the latter is indicative of how far the Greek crisis has come.
Over the last 24 hours, the Syriza negotiation team has sounded less confrontational. Alexis Tsipras continues to express hope that agreement will occur, and has spoken with President Obama and to the European Parliament. Francois Hollande and Matteo Renzi have publicly lead the call for Greece to stay in the euro and for the system’s integrity to be maintained. Some people believe there may yet be ways in which the European Stability Mechanism’s €500bn bailout fund could pay off Greek loans and recapitalise the banks, leaving Greece to its own devices which may end up in exit anyway—but it may be too late for this.
Nevertheless, while the possibility of compromise and agreement is still there, the omens are not auspicious. In spite of the strong OXI vote, European leaders expect Greece’s proposals to be tougher than those that proved so contentious a week ago before the referendum. It is hard to see how Syriza could do this unless it were to capitulate and defy its own recommendation to Greek voters. Its demand for debt relief, for which it can claim support from the IMF and an overt or implicit recognition in macroeconomic circles, remains problematic. European leaders can probably hold out the prospect subject to fulfillment of loan conditions, but the standard line is that write-offs and other debt reduction measures will not be given up-front and may be a problem anyway under the terms of the European treaties.
If agreement is not reached on Sunday, Greek banks will stay shut. The ECB will most likely not be able to raise its assistance to the Greek banking system, and probably cut the line if Greece defaults to it on 20th July. A parallel currency system will emerge, and that will really be the beginning of the end.
