What will the Greek Government Look Like on Monday?

The capitulation of Greek Prime Minister Tsipras towards the demands of the official lenders has split the Syriza coalition.  In regards to a quarter of the party declined to make the apparent U-turn with the Prime Minister.  Those that were part of the cabinet have been replaced.  However, they maintain their seats in parliament, and apparently obstructing the government'utes efforts. 

At meeting with Syriza's main committee today, Tsipras was clearly frustrated.   The rebellion through 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 recognized 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 expert.  He had initially offered a celebration congress in September.  However, this did not seem to appease his critics within Syriza, and he has proposed a election within the party, a referendum, for a moment, on the 86 bln euro help program being negotiated.    In the event that Tsipras losses the vote, snap election would seem inevitable.  That said, Italy has changed prime ministers 3 times without a national election.

An estimated 40% of the Syriza's central committee (roughly 80 of Two hundred members) does not support Tsipras' credits to the creditors.  A significant quantity think that Greece should leave EMU and bring back the drachma.   Tsipras proposes, as we have, that badly as the EMU might be, it would be even worse outside of it.  A deeper recession, higher unemployment, damage of the banking system, and a larger drop in living requirements would be the likely result.  It does not have the export capacity or even economic structure to enjoy the benefits that are often thought to come from a weaker currency.  

Syriza's central committee is anticipated to make a decision later today, whether or not to accept the fait accompli that Tsipras and the realos allies have given the fundis.  Ironically, if Tsipras' course is declined, and national elections are kept, Tsipras may return.  He is the most popular politician in Greece and much more popular it seems that the Syriza Celebration itself.  In addition, the two main tradition parties are in transition on their own.  The Socialists (PASOK) have just chosen 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 actual board that Greece's high debt levels and weak track record of implementing reforms disqualifies this from future assistance.  This ought to be understood as a recommendation and never the declaration of policy.  That’s a prerogative of the shareholders.

While the actual reports appeared to weigh on the euro and lifted German bunds and the Swiss franc, it merely confirmed what had recently been hinted.  Last week the IMF formally announced the end of the current program that was to run through Q1 Sixteen. Greece's request from an additional program was what the staff report was addressing.

Reports show that the several non-European board people, including Brazil, Canada, and Asia, argued that the IMF's reputation and credibility are in risk.  They, along with the staff, see Greece falling short of two requirements needed for an additional package.  First, it does not have the" institutional and political capacity" to implement the economic reforms.  This is a concrete manner in which Tsipras' distaste for the program and also the splintering of the Syriza coalition is impacting. 

Second, Greece's public debt burden isn’t sustainable in the medium phrase.  The IMF has been clear that it could not and it would not take part in a third assistance program unless there was substantial debt relief.  Indonesia 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, however an election could hold off 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 gets to 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 remarked that the only alternatives were a whole lot worse.  Along with former Finance Minister Varoufakis, he resisted recognizing the legitimacy of the Troika.  That hand also turned out to be ephemeral.  Instead of the Troika, A holiday in greece is going to be negotiating with a "quadriga" of the IMF (whether it participates or not in aid), the ECB, the EC, but for the first time, the ESM.

If Syriza holds the referendum Sunday and Tsipras loses this, or even if he hardly 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 mortgage will be needed so A holiday in greece can pay the ECB (and to a much lesser extent other lenders, including the IMF) in August.  

The Ancient greek central bank did not request more ELA access this week as the deposits had stabilized.  A loss of revenue for Tsipras would likely renew doubt and anxiety and spur another wave of deposit flight.  Although Greece continues to be given the authority to re-open the stock exchange, which has been closed for a 30 days, but ring fencing this to let equity trading occur within the existing capital regulates is providing to be quite difficult.

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

Could the Greek Federal government Collapse this Weekend? is republished along with permission from Marc to Market