Contrary to what Greek Prime Minister Alexis Tsipras might think, time is not on his country’s side in its negotiations with the IMF and its European creditors. Since the longer that Greece drags out these negotiations, the higher the probability that the country will default on its official debt and introduce capital controls. This has to make the prospect of early Greek elections, which would further delay the successful conclusion of those negotiations, something that is to be feared.
Since assuming office at the end of January 2015, the Syriza government has shown no urgency in coming to a deal with its creditors on an economic program. Instead, these negotiations have dragged on now for four months with no end in sight. This has had two major adverse consequences for the Greek economy. The first is that the Greek banking system has lost more than EUR 35 billion in deposits as domestic depositors have lost faith in the banking system. This loss amounts to around 20% of overall Greek deposits and has required ever-increasing European Central Bank (ECB) support to keep the banking system afloat. The second is that a climate of political uncertainty has caused the Greek economy to move decidedly back into recession. That move, together with an ill-advised decision to provide tax relief, has resulted in the Greek primary budget balance shifting back into deficit, which in turn now requires more budget austerity.
Faced with an open revolt by a large faction of the ruling Syriza Party against the terms now being offered by the European creditors, there is increased talk in Athens of the need for either a referendum or a new election. It is thought that this might be needed to give Mr. Tsipras a mandate for accepting the terms now being proposed by Greece’s creditors. However, such a course would necessarily involve a delay in the negotiations for at least a month since that is minimally how long an election would take to hold.
The last thing that Greece can now afford is another month of political uncertainty. Such uncertainty is bound to hasten the deposit outflow from the Greek banks as well as to further damage both household and investor confidence in the economy. With the ECB’s patience already wearing thin, it would seem too much to expect that the ECB would pony up additional money to keep the Greek banking system afloat in the event of a renewed bank run. In the absence of signs of an early agreement, it would also seem too much to expect that Greece’s official creditors would be prepared to release funds to keep the Greek government afloat by plugging its budget deficit.
The sad reality is that time is quickly running out for Greece and the country is now facing the real specter of capital controls and default. If Greece is to avoid that fate, it will need to get its political act together and it will need to do so very fast.