Could the Greek Government Collapse this Weekend? 

The capitulation of Greek Prime Minister Tsipras to the demands of the official creditors has split the Syriza coalition, with those that were part of the cabinet being replaced.  However, they retain their seats in parliament and are apparently obstructing the government’s efforts.

The capitulation of Greek Prime Minister Tsipras to the demands of the official creditors has split the Syriza coalition. About a quarter of the party refused to make the apparent U-turn with the Prime Minister. Those that were part of the cabinet have been replaced. However, they retain their seats in parliament, and are apparently obstructing the government’s efforts.

At a meeting with Syriza’s central committee today, Tsipras was obviously frustrated. The rebellion by the faction that we have likened to the fundis in the German Green Party, more principled than pragmatic, is yet another stumbling block in negotiations with the official creditors.

Tsipras had wanted to wait until after the negotiations for a third aid package were complete, but effectively leading a minority government undermines Tsipras’ negotiating authority. He had initially offered a party congress in September. However, this did not seem to appease his critics within Syriza, and he has proposed a vote within the party; a referendum, if you will, on the 86 bln euro assistance program being negotiated. If Tsipras losses the vote, a snap election would seem inevitable. That said, Italy has changed prime ministers three times without a national election.

An estimated 40% of the Syriza’s central committee (roughly 80 of 200 members) does not support Tsipras’ concessions to the creditors. A significant number think that Greece should exit EMU and bring back the drachma. Tsipras argues, as we have, that as bad as the EMU might be, it would be worse outside of it. A deeper recession, higher unemployment, destruction of the banking system, and a larger drop in living standards would be the likely result. It does not have the export capacity or economic structure to reap the benefits that are often thought to come from a weaker currency.

Syriza’s central committee is expected to make a decision later today whether to accept the fait accompli that Tsipras and his realos allies have given the fundis. Ironically if Tsipras’ course is rejected, and national elections are held, Tsipras may return. He is currently the most popular politician in Greece and more popular it seems than the Syriza Party itself. In addition, the two main tradition parties are in transition themselves. The Socialists (PASOK) have just elected a new leader, and the center-right New Democracy is in the middle of a leadership contest.

Solidifying his flanks and bringing the fundis to heel become even more important today. Press reports indicate that the IMF’s staff has told the board that Greece’s high debt levels and weak track record of implementing reforms disqualifies it from future assistance. This should be understood as a recommendation and not the declaration of policy. That is a prerogative of the shareholders.

While the reports appeared to weigh on the euro and lifted German bonds and the Swiss franc, it merely confirmed what had already been hinted. Last week the IMF formally announced the end of the current program that was to run through Q1 16. Greece’s request from another program was what the staff report was addressing.

Reports indicate that the several non-European board members, including Brazil, Canada, and Asia, argued that the IMF’s reputation and credibility are at risk. They, along with the staff, see Greece falling short of two requirements needed for another package. First, it does not have the “institutional and political capacity” to implement the economic reforms. This is a concrete way in which Tsipras’ distaste for the program and the splintering of the Sryiza coalition is impacting.

Second, Greece’s public debt burden is not sustainable in the medium term. The IMF has been clear that it could not and would not participate in a third assistance program unless there was substantial debt relief. Germany and other creditors refuse to consider debt relief until there is evidence that Greece is implementing the reforms it promised. This was expected to take place in Q4, but an election could delay this further. One idea is that the IMF would re-engage after the debt relief has been granted.

The great Yankee philosopher Yogi Berra once advised if one reaches a fork in the road, one should take it. Tsipras thought there was a fork in the road, that there was an alternative to the creditors’ demands. However, he realized that the only alternatives were even worse. Along with former Finance Minister Varoufakis, he resisted recognizing the legitimacy of the Troika. That fork also turned out to be ephemeral. Instead of the Troika, Greece is going to be negotiating with a “quadriga” of the IMF (whether it participates or not in aid), the ECB, the EC, and for the first time, the ESM.

If Syriza holds a referendum Sunday and Tsipras loses it, or even if he barely wins, the risk of a new election will likely weigh on the euro when the markets re-open after the weekend. It would further increase the likelihood that another bridge loan will be needed so Greece can pay the ECB (and to a much lesser extent other creditors, including the IMF) in August.

The Greek central bank did not request more ELA access this week as the deposits had stabilized. A loss for Tsipras would likely renew uncertainty and anxiety and spur another wave of deposit flight. Although Greece has been given the authority to re-open the stock market, which has been closed for a month, ring-fencing it to let equity trading take place within the existing capital controls is providing to be quite difficult.

As it turns out, a party referendum may be more significant for the future of Greece than the national referendum earlier this month.