Sorry, I think Paul Krugman’s grad school friendship with Mario Draghi has blinded him to the obvious. Syriza, via Varoufakis, has refused the latest tranche of its “bailout” loan because it is convinced it can continue its debt payments past the end of February with its own resources. That’s supposed to give it negotiating time. But the real ticking clock is its banking system. There has been a steady, persistent run on Greek banks, with deposits down 6% in the month before the latest election. No doubt the rate has accelerated since then. And now the ECB has announced that one of its two funding facilities to backstop the Greek financial system has been shut down until further notice.
You can debate what this means technically, whether the ECB’s emergency liquidity assistance (ELA) is large and credible enough to do the job, but the primary effect will be to turn the bank run into a rout. That appears to be the intent. This will presumably demonstrate to Syriza that the game is up, and there is no alternative but to stop making demands and get back on the program. You would have to do a lot of analytical gymnastics to conclude, with Krugman, that an engineered Greek bank run is really just a covert message to Germany to be more reasonable.
The moment of decision for Syriza is not later but now. Capitulation is out of the question. The only choice is to formulate its own plan, separate from the ECB, to cope with the collapse of its banks. I hope they recognize that direct attempts to stop the run through capital controls and withdrawal limits are a form of political suicide: if depositors are denied access to their funds the government will not last another week. The task is to develop a source of funding that does not require prior withdrawal from the eurozone.
Meanwhile, it is difficult to express how utterly wrongheaded this latest ECB move really is. It is one thing to equivocate about being a lender of last resort, another to foment a bank run on purpose. Sort of like the fire department in Fahrenheit 451.