The Greek People Just Destroyed Syriza’s Strategy

by Wolf Richter, Wolf Street

Greek stocks ventured deeper into purgatory. The ASE index dove below 700 intraday on Wednesday for the first time since the crisis days of June 2012. Then word spread that the ECB had raised the cap on the Emergency Liquidity Assistance for Greek banks by €1.5 billion to €75.5 billion. It’s the oxygen line for Greek banks. Without it, they’re toast.

The ELA provides the liquidity so that the Greeks can continue yanking their beloved euros out of their banks to stash them elsewhere before their desperate government confiscates them.

The government, under the cool leadership of Prime Minister Alexis Tsipras and Finance Minister Yanis Varoufakis, is already confiscating €2.5 billion in “idle” cash that state agencies, state-owned enterprises, and local governments kept at commercial banks, the same banks that the ELA is propping up and that the Greeks are fleeing. Now these entities have to transfer the money to the central bank so that the government can “borrow” it for other purposes.

When word got out that ELA money could continue to flow to the banks for a little while longer, the dreadfully beaten-down FTSE Athens Banks index jumped over 11%. It remains 74% below where it was last June. The overall ASE index recovered to settle above 700. It remains a mere shadow of its former self, down 87% from its cheap-euro-debt peak in 2007.

Greek 2-year yields and 3-year yields, unlike their Eurozone brethren that are blissfully bathing in the negative, jumped to nearly 30%. The 5-year default probability is approaching 90%. In short, the Greek financial markets are kissing the euro goodbye.

But the Greeks themselves love their euro. Enough of them believed the Syriza’s promises to sweep them into power. Now their choice is conflicting with their love for the euro. And by the looks of it, they’d rather hang on to the euro than the Syriza.

The sticking point to getting further bailout money from taxpayers of other countries, mostly those in Germany and France but elsewhere as well, is that Greece is playing game theory and is trying to elevate its extortion racket to a fine art, instead of trying to work out a deal that the taxpayers of those donor countries can live with. Donor countries, not creditors, because they know they’ll never see part of their money ever again.

Media-savvy characters in the government have been using leaks and outright pronouncements to threaten default and even an exit from the euro. It would be a terrible fiasco for the world financial markets, they keep saying, pointing back at the dark days of 2011 and 2012 when vague and subtle expressions by Greek politicians caused stocks in Europe and elsewhere to plunge. But now, stocks and bonds around the world are soaring to new highs. To heck with Greece. Embarrassingly, only Greek markets are crashing.

So the extortion racket no longer works, and the Greeks themselves are having second thoughts about how their representatives have been conducting it.

The approval rating for the government’s strategy has plunged to a measly 45.5%, from 72% just last month, according to a new poll. A terrible cliff dive.

On a scale of 0 to 10, the administration got whacked in its details, earning 4.6/10 on the economy, 3/10 on immigration, 3.7/10 on crime-fighting and security, 4.2/10 on education, 5.5/10 on foreign policy and defense, 4.5/10 on public administration, and 4.4/10 on health.

Only 3% of the Greeks were confident their household finances would improve over the next 12 months, while 26.5% expected their situation to get worse, and another 15% were certain it would get worse.

How did they feel about a “Grexit” – and a return to the drachma? “Fear!” That’s what 56% said – up from 45.5% in March. Only 23% claimed they were indifferent, down from 26.5% last month. And just 9% thought there was no chance of it happening, down from 17% in last month.

Greece’s exit from the Eurozone and return to the drachma, of which it could print an endless amount to pay its bills and salaries and other schemes, would entail a vertigo-inducing devaluation, and all that comes with it.

The Greeks know how that program works. They have experienced the drachma. They see it as a tool by which the government tries to steal from them. They don’t trust their government with the administration of a currency any more than they trust their banks. And Greek parliamentarians don’t want the drachma either. They want their rich pensions to be paid in euros, not in devalued drachmas.

Thus, a Grexit is off the table as far as threats is concerned. It might happen, but it can’t be used as a threat to extort better terms from donor countries. The Greek game-theoreticians can evoke it all they want to, through leaks and on the record, and they can bandy about the threat of blowing up the world markets, but if they want to stay in power and if they want to face their people at home, they can’t go down that road.

Alas, all their negotiating partners know that too. The global financial markets know that. They all could digest a Grexit, but the Syriza government could not. Time to stop playing games and start talking in earnest. Or face some very, very angry folks at home.

Greek banks aren’t the only ones that have problems. The EU competition regulators – not the eyes-closed bank regulators – are going after them. And they have real teeth. Read… This Could Sink Banks in Greece, Portugal, Spain, and Italy

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