Can the United States Prevent a Grexit?

The announcement that no new credit would be forthcoming raised the possibility that Greek banks would run out of money this week.Photograph by Konstantinos Tsakalidis / Bloomberg via Getty

As the crisis in Greece continues to escalate, two questions arise. What’s really happening? And which side is in the right? For today, I’ll stick with the first question.

With Greece’s banks closed and the rest of Europe warning that the referendum Greece will hold this coming Sunday, on whether to accept the bailout terms extended by the country’s primary creditors, amounts to a yes-or-no vote on the country staying in the eurozone, investors are betting that Greece will crash out of the eurozone. On Monday, European stock markets fell sharply, and one widely respected analyst, Mohamed El-Erian, put the odds of drachmas returning to circulation at eighty-five per cent.

Given the level of acrimony between the two sides, there is no doubt that events are heading in the direction of a Grexit. However, one thing we’ve learned from this story is that it’s not over until it’s over. The referendum is six days away. There is still time for a face-saving agreement to be put together—and the United States appears to be trying to mediate between the two sides, or, at least, to persuade them to restart the negotiations.

Over the weekend, President Obama spoke with Angela Merkel, the Chancellor of Germany. On Monday, he spoke with François Hollande, the French President. A Reuters report quoted an aide to Hollande saying that the two leaders “have agreed to pool their efforts to facilitate a resumption of the talks so as to find a solution to the crisis as soon as possible and ensure Greece’s financial stability.” Meanwhile, Jacob Lew, the American Treasury Secretary, called Alexis Tsipras, Greece’s Prime Minister, and he has also spoken to Christine Lagarde, the head of the International Monetary Fund, and Wolfgang Schäuble, the hard-line finance minister of Germany.

Of course, for a deal to be put together, both sides would have to be willing to make some concessions, and at this stage it’s by no means clear that they are. Over the weekend, I spoke to a couple of knowledgeable observers who both expressed the view that the European Union, and Germany in particular, had deliberately instigated a confrontation to bring about regime change in Athens.

Last week, after prevaricating for months, Tsipras’s Syriza Party government put a detailed offer on the table that went some way toward meeting its creditors’ demands for a continuation of austerity policies, but that also requested recognition that Greece urgently needs some debt relief. Rather than accepting this offer as the basis for an agreement, Greece’s partners demanded further cuts in pensions and other government programs, and they rejected outright the idea of considering debt relief, saying that it should be left to a future deal. This placed Tsipras in an invidious position. If he made more concessions, he would almost certainly have faced an internal revolt. If he refused to bend, he would be opening up the possibility of Greece crashing out of the eurozone, which most Greeks don’t want to see happen, and which, too, could have spelled the end of the Syriza government.

Of course, every story has two sides. European officials claim that the negotiations were actually going pretty well last week, with the gap between the two sides narrowing in a number of different areas, including the budget targets that Greece would adopt and how changes would be made to various programs, such as when the country’s retirement age would be raised. According to this version of events, there was a realistic chance of an agreement before Tuesday, when the bailout was due to expire. But Tsipras, either because he couldn’t sell such a deal domestically, or because he thought that, by raising the prospect of a Grexit, he could frighten the other European countries into making him a better offer, decided to upend the talks and announce a referendum.

Whatever Tsipras’s motivations were, the announcement of the referendum prompted the creditors to harden their position. On Saturday, European finance ministers refused to extend the existing Greek bailout beyond Tuesday’s deadline, as Tsipras had requested. And on Sunday, the European Central Bank, which has been propping up Greece’s banks with emergency loans, refused to increase the amount of money it is extending through these programs. In keeping the existing programs in operation, the E.C.B. prevented an immediate collapse in the Greek banking system. But the announcement that no new credit would be forthcoming raised the possibility that Greek banks would run out of money this week. That prompted the Greek government to announce a bank holiday, which will last until after Sunday’s referendum, and to impose restrictions on moving money in and out of Greece, which could last a lot longer.

On Tuesday, Greece will miss a loan payment of 1.6 billion euros to the I.M.F., thus placing the country in default and moving the crisis into another phase. Unless Greece’s other debtors trigger cross-default clauses in their loan contracts, which seems unlikely, the default shouldn’t have much immediate impact on other financial institutions, experts said on Monday. It looks like the current “time out” in Greece’s financial system will be extended until after Sunday’s referendum.

Theoretically, that should aid the Obama Administration with its efforts to organize one more round of negotiations before the referendum, in the hope that talks will produce an agreement that the Greek government will endorse. But if there is to be a last-minute compromise, the Europeans will have to offer Tsipras something that will justify a u-turn. One option, which the U.S. government appears to be pursuing, is a promise of at least some debt relief. But that seems to be a distant possibility. At a press conference in Berlin on Monday, Merkel appeared alongside her Vice-Chancellor, Sigmar Gabriel, who reiterated that Greece had to follow the same rules as everyone else in the eurozone. Debt relief would be considered only in a follow-up agreement, he indicated, and even then it would be limited to extending maturities and lowering interest rates—it would not entail outright cancellation. The Greek Prime Minister wanted a very different euro zone, which was a dangerous idea, Gabriel added.

As I said, this isn’t over yet. But the Obama Administration may well be about to discover what the Irish, the Cypriots, and the Greeks have already found out: flexibility isn’t the E.U.’s strong point.