6 July 2015

Greeks vote OXI – so now what?


In the end it wasn’t even close. It turns out Greek opinion polls are no more reliable than British ones. Far from the knife-edge decision polls predicted, the Greek referendum rejected the European Commission’s bailout terms (which, we should not forget, were going to be rejected by Eurozone finance ministers as “too soft”) by a huge margin of 61% to 39%.

One interesting tangent here concerns European voters in referendum about the EU. It seems they always vote against it, given the chance. If any new Treaty terms secured by the UK in its renegotiation were to go to a referendum in France or the Netherlands, say, what chance would they have? Indeed there is the deliciously ironic possibility that the UK might be the only place a referendum on the EU can now go the pro-EU way!

What happens next with Greece and the Eurozone? Some voices urge that Greek Prime Minister Alexis Tsipras needs to compromise to make a deal. That seems a bizarre suggestion to me. He wasn’t willing to compromise before but now he will having just won a huge majority in a referendum?? Would it even be constitutional to compromise after the referendum rejected compromising?

So perhaps the Eurozone might back down and offer Greece the debt forgiveness it demands, plus a 3rd bailout with no conditions attached (the Greek proposal from last week)? Believe that and you’ll believe anything. Many of the most senior policymakers in Europe spent last week saying the Greek referendum was de facto on whether to stay in the euro. They can’t give way now.

Indeed, the referendum result is likely to leave them with much less appetite for any kind of compromise. One reason for other Eurozone ministers to keep talking to the Greek government despite the abuse, insults and so forth has been the thought that if they waited long enough, Syriza might be replaced by someone else more amenable. But the referendum result tells them that this is really what Greece wants, not just some particular here-today-gone-tomorrow politicians.

The next steps are all about the Greek banks. The ECB stopped extending its emergency liquidity assistance (ELA) to them last week (partly because there was no deal and a referendum, but also partly because it had become so large that the Greek banks had ceased to qualify for such assistance under the normal rules, even if there had been a deal).

With ELA frozen, the Greek banks (shut all last week) can’t reopen unless either there are “haircuts” for depositors – ie they lose some money – so as to recapitalise the banks, some other government(s) put in some money to recapitalise them (very unlikely now) or Greece establishes its own new currency with a new central bank to provide its own liquidity.

On Sunday the Greek government demanded, furiously, that ELA be extended. The ECB refused.

So we have a race. How long can Tsipras and broader Greek society accept the Greek banks remaining shut? He has personally promised no depositor haircuts, so they can only open with a deal (releasing ECB funds) a new Eurozone or other creditor support package (recapitalising them directly) or Grexit.

Tsipras still isn’t quite ready to urge for Grexit himself. He wants to be ejected, not to leave. Key Eurozone politicians in Germany, Finland and Slovakia seem eager to grant him his wish. But if they can hold off for a few days more his banking situation will force his hand.

The Greek Finance Minister Yanis Varoufakis says the government is ready to issue IOUs (really a parallel currency) to pay its bills. That can get them through a few days but won’t reopen the banks.

If Tsipras can keep going, somehow, until July 20th he gets to default on the ECB and then really will be kicked out. There was an intriguing suggestion, easily missed amidst the noise of the referendum campaign, that Greece actually defaulted on a small payment to the ECB at the end of June (a bill it is supposed to pay to the Greek central bank every year). We may yet hear more about that.

In truth, though, most folk realise this is it. Grexit is coming now – probably in days or weeks not months.

As they say in financial markets: “You can stick a fork in it – it’s done.”

Andrew Lilico is Chairman at Europe Economics.