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Eight days after its appointment, the new Greek Government has shown clear signs of growing swiftly into the responsibilities of power. And so it should: the opportunity of gaining historic credit for a revolutionary change in the country’s fortunes is a prize indeed. It only requires innovative thinking and some more patience - but also great political courage. The most recent comments suggest that courage is available.
The Greek banks have just passed the ECB’s stress test BUT such tests are designed for `ordinary’ macro-economic crises, and not a run on the entire financial system of a state driven by loss of confidence in the credibility of its government. For Greece, an Irish-style run may need a further €25 billion of cash in the near future. Stemming the run completely may require a cast-iron guarantee for the remaining €160 billion of deposits. The ECB certainly cannot do that by technical wizardry through the back-door. That would require a near-doubling of the total loans and guarantees already issued by the euro area. Such a dramatic show of overt political solidarity seems implausible for a government that claims a mandate from its electors to repudiate existing debts.
Instead, it should take the time to slash defence spending – still the highest in the euro area – and carry through its revolutionary plans for taxation. (Unfortunately, that may alarm some depositors even more.) These moves could provide the headroom to re-orient public spending rather than dramatically increasing the total. With that comfort, the euro area could roll forward the existing programme for a few months, thus enabling the ECB to drip feed the Greek banking system with liquidity.
The alternative is dire, so time is short for the new Syriza government to recognise the gravity, and imminence, of the peril and move decisively and unambiguously to do a deal with euro area on the generous terms that seem to be on offer. The acid test is regaining the confidence of Greek bank depositors. The Humpty Dumpty is already slipping off the wall. If he actually falls, then he cannot be “put together again by all the King’s men” – or even the EU - for a long time.