The Greek government announced they will hold a referendum this Sunday for the electorate to decide if they wish to reject or accept a set of measures that will unlock a final disbursement of funds from their second financial bailout programme. The country is technically now in arrears on a €1.5bn repayment due to the International Monetary Fund (IMF) on June 30 and the second bailout programme actually ended on the same day, but these complications are not insurmountable should the Greeks vote “yes” to belatedly accept the reforms-for-financial-aid-package. Voting yes will also pave the way for a third bailout programme which is likely to include various forms of debt relief. A “no” vote will continue the recent gridlock and will likely hasten an eventual Greece exit from the Eurozone (Grexit). Thus, Sunday’s referendum is ultimately about staying in or getting out.
The government will campaign for a “no” vote and in his address to the nation, Greek Prime Minister Tsipras explained that should the Greek electorate turn down the package that was offered to them, he would have the political legitimacy to go back to the negotiating table to ask for more favourable terms from the creditors (the IMF, ECB and the European Commission, collectively known as the “institutions”). However it is far from clear, indeed somewhat unlikely, that the institutions will accede to additional demands from the Greeks. Germany will have to put the size and terms of any new bailout package to an already hostile Bundestag; Spain may see similar demands made by non-centrist opposition parties at their General Election due at the end of this year; and the Irish who took the austerity pill and successfully emerged from their own bailout programme will feel short changed. Furthermore, Italy and France have lagged on structural reforms and may have few incentives to now raise the pace should easier terms be offered to Greece.
A no vote will therefore be negative for the Eurozone and highly negative for the Greeks who are likely to try to struggle on with capital controls, no additional funding from any external source (apart from humanitarian), a dysfunctional if not bankrupt banking system and stagnant if not negative economic growth. Eventually they may choose to default on other remaining loans, including a repayment of €3.5bn due to the ECB on July 20, and a parallel currency may start to emerge. The latter may take the form of IOUs issued by the government which if tradable, as they must be if they are to be convertible into goods and services, will quickly depreciate in value vis-à-vis the Euro. Grexit may eventually follow.
That said, we do not see a return to the high financial and real economy stress that we witnessed in May 2010 or in June 2012. For the rest of the Eurozone, what matters is that contagion is limited, and in particular that depositors and investors do not fear that the Greek experience could be repeated in other Eurozone countries. Policy makers will not want to stop a recovery that is starting to take root and which, Greece turbulence aside, looks sustainable. We take seriously the ECB’s promise that “the Governing Council is determined to use all the instruments available within its mandate” to protect the Eurozone economy. Hence a no vote is likely to bring the ECB pre-emptively into play; this will not be license from the ECB for investors to take risk whatever the outcome, but a reassurance that they will curtail very negative outcomes in financial markets that may stop or reverse the Eurozone’s economic recovery. A Greek exit would also provide further impetus to fiscal integration among Eurozone countries.
One final point – we expect a relief rally in the event of a yes vote. It will certainly be a more emollient outcome than a no. But this will not end the Greek crisis once and for all. PM Tsipras will very likely have to resign and a new government will be formed. There will still be issues surrounding the terms of a new deal, as well the ability of the new government to implement and deliver. The drama will roll on. Stay tuned.