Opinion: Greece’s government has only itself to blame for Sunday’s election

Published: Sept 16, 2015 5:01 a.m. ET

Market Watch

By SATYAJIT DAS

Greece’s election on Sunday is the third time its citizens have gone to the polls this year, and unfortunately this new election was not unexpected.

The Syriza-led government has played its hand badly, failing to extract significant concessions from its eurozone paymasters. Syriza’s performance suggests a lack of preparedness and a poor understanding of the seriousness of their predicament. The cacophony of voices and an excessive desire for the limelight was unhelpful in what were always going to be difficult negotiations.

The assumption that the European Union would respect both the democratic process and the new Greek government’s mandate was optimistic. Consider that in 2011, then-Prime Minister George Papandreou’s attempted plebiscite on austerity policies in 2011 was dismissed by the eurozone as “disruptive,” leading to the appointment of an unelected technocrat, Lucas Papademos, palatable to Brussels.

In late 2014, Pierre Moscovici, the EU Commissioner for Economic and Financial Affairs, visited Athens declaring support for Antonio Samaras, the beleaguered Greek prime minister, who was willing to continue the EU-dictated policies, describing Syriza’s position as suicidal. After Syriza won election, German Finance Minister Wolfgang Schaeuble stated that elections changed nothing, warning that things would become difficult if Greece took a different path. This position was reiterated by European Commission President Jean-Claude Juncker more recently: “There can be no democratic choice against the European treaties.”

Syriza’s negotiation tactics, portrayed as sophisticated game theory moves, were incoherent. Digressions into side issues such as return of German war plunder, whatever the merits of the claim, were distractions. The repeated reference to the 1953 London agreements forgiving German debts was irrelevant. The Cold War reasoning which led the Allies to behave generously towards Germany was inapplicable.

The Greeks also gave up their trump card even before the negotiations commenced. The threat of a Greek default and withdrawal from the euro EURUSD, +0.1063%  simultaneously would have rattled the eurozone and offered Greece the best chance of long-term recovery.

Repudiation of existing debt or redenomination in new drachmas would inflict significant losses on creditors. The European Central Bank and the European Financial Stability Facility would presumably have to seek actual funds from eurozone guarantors, contradicting the often-stated lack of risk of the bailout arrangements and the absence of taxpayer exposure.

While extremely painful, this move would arguably leave Greece no worse off. Importantly, Greece would reclaim sovereignty and control over its currency and interest rates. This would ultimately allow Greece to devalue to regain competitiveness. In addition, it would help reverse capital outflows

The government’s decision against this option reflects multiple factors. A Greek default within the eurozone has always been favored by former Finance Minister Yanis Varoufakis. Greece’s electorate awarded Syriza a schizophrenic mandate to eliminate austerity but stay within the euro. Middle- and upper-class Greeks want to continue to receive pensions and payments in hard euros rather than in more volatile drachma.

The surrender of this potent threat created, from the outset, a paradox. Greeks feared a “Grexit” more than the lenders, leaving the government with minimal leverage and bargaining power.

Compounding the weakness was the failure to anticipate and prepare contingency plans for coping with capital flight. The reliance of Greek banks on ECB funding was ignored. Both problems had been obvious from before the 2015 election.

Predictably, as the outflow accelerated with post-election uncertainty, the absence of restrictions on withdrawals and outward remittances fatally increased reliance on ECB emergency funding. With the ECB tightening collateral rules and controlling funding to Greek banks, the risk of a complete collapse of the banking system further reduced the government’s bargaining position.

In order to continue to meet repayment obligations, the Greek government commandeered local government reserves and balances of other public-sector organizations, as well as delaying tax refunds and payments to suppliers. These actions to placate its creditors smacked of desperation and a government lacking control, which eroded popular support. Many local authorities did not comply, preferring to spend the money rather than hand it over.

The Greek government’s appropriation of funds earmarked for specific purposes alienated even its own supporters. Only the neo-fascist Golden Dawn party is now promising real change.

As the Greek government failed to achieve its objectives, it played the victim, convincing itself that the nation was faultless and the rest of Europe, led by Germany, wanted to punish Greece. Syriza would have done well to heed German statesman Otto von Bismarck’s advice: “Woe to the statesman whose arguments for entering a war are not as convincing at its end as they were at the beginning.”

Satyajit Das is a former banker. His latest book is “A Banquet of Consequences” (in Australia and Europe), or “Age of Stagnation (in North America and Asia).