Greece's Choice of Disasters

Get used to scenes like this.

Photographer: Konstantinos Tsakalidis/Bloomberg

After months of confusion and indecision over Greece and its debts, a moment of clarity may finally be approaching. The referendum called for July 5 by Prime Minister Alexis Tsipras promises some kind of resolution. For that, at least, one should be grateful.

QuickTake Greece's Fiscal Odyssey

There is little else to celebrate. Getting to next Sunday without a financial breakdown in Greece looks impossible; Greeks are already lining up at ATMs. And the choice confronting them when they vote will be between two very bleak alternatives. This mess is a textbook case of political shortsightedness and catastrophic mismanagement.

At one point, a referendum made sense as part of the way forward. Not anymore. The idea was for creditors to moderate their demands and include discussion of debt relief in a deal. Aside from having merit on its own terms, such a bargain would have let Tsipras claim a small victory, and allowed him to ask the country to support the agreement, which in turn would have strengthened its credibility.

Related: Greece Default Watch

No such luck. The creditors wouldn't bend; Tsipras has attacked their offer bitterly, and seems likely to call on the country to reject it. Greeks must choose between commitments that will worsen their short-term suffering and do little to improve their long-term prospects, or immediate default, likely ejection from the euro system, and even greater political and economic turmoil.

Offered this dismal choice, Greek voters should accept the terms, and perhaps they will -- but it is a capitulation that won't repair the Greek economy, and this surrender will sting for years. The European Union should never have demanded it, and will surely come to regret that it did.

First, though, comes the immediate challenge of getting to the referendum in an orderly way. A vote to affirm a deal backed by the government would have relieved the stress on the Greek banking system. A vote on a deal opposed by the government will ramp it up. If banks are allowed to open on Monday, they will most likely be subject to a full-scale run.

Because no deal has been agreed upon and Tsipras, in effect, is calling for default, it is hard to see how the European Central Bank can continue to accept Greek bonds as collateral for its liquidity assistance. Underlining the point, Greece will go into arrears with the International Monetary Fund on Tuesday. Without ECB support, the banks will have to close, and capital controls will have to be put in place. Very quickly the government will be forced to issue IOUs to pay wages and other costs.

Even before the referendum, Greece may therefore be halfway out of the euro system. Then, depending on the vote, Tsipras may have to resign, and Greece will be without a government.

This, to repeat, is the best-case scenario.

Tsipras has failed his country. He seemed to delight in infuriating the creditors and uniting them against him. That was a reckless strategy, and it has failed. But the EU's leaders, the IMF and the ECB are even more at fault. They have extended and deepened the crisis for no good purpose. Their intransigence in recent days suggests a willingness, even an eagerness in some quarters, to see Greece default and exit the euro system.

Whatever the result next Sunday, there's a fair chance that both those things will happen in the end. And however the Greeks vote, an already weakened euro system will be left even weaker when the next crisis comes around. It is a still-unfolding disaster, and it need never have happened.

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