Greeks rejoiced when their Syriza-led government let them decide their own fate by giving them a vote on whether to accept the bailout the EU was offering them.
But two days later, it is looking like the referendum was completely pointless.
Greece was given the simple “Yes” or “No” (“Nai” or “Oxi” in Greek) choice on July 5, over whether it should accept a range of austerity measures set out by the country’s creditors in exchange for more cash to keep the nation afloat. This included pension cuts and tax increases.
In the end, over 60% of Greeks voted “No,” which is hardly surprising considering the country’s unemployment rate is over 25%, the average income for a family is at a 12-year low, and 40% children in Greece now live below the poverty line.
They don’t want more painful austerity measures.
Can you blame them? Look how terrible Greece’s economy is at the moment. This chart from the Royal Bank of Scotland summed up how the collapse in its GDP “is among the worst advanced economy falls since 1870.” (Even more devastating, most of the other economies collapses were due to war.)
However, all that the referendum has done has put Greece in a worse position than it ever has been before: The announcement of the referendum immediately triggered strict capital controls — a closure of the banks, limits on depositors’ cash transfers and how much they can take out of ATMs and still the country is down to its last €500 million ($US772.6 million). The mere announcement also led to deal talks being suspended. Greece has no cash, is further away from a deal, and has a weakened its position at the negotiation table.
European Commission President Jean-Claude Juncker confirmed what many people were thinking today. He says the referendum result is “no longer valid”:
The Greek Prime Minister knows that the question asked in the Greek vote was no longer valid. I’m against a Grexit but we must discuss what ‘respecting the Greek vote’ means … I’m very saddened that the Greek delegation left the negotiating table — you don’t do that in Europe. It was a big mistake. We must try and find a solution.
Technically pointless from the start
Not only was the call for a referendum pointless in getting Greece “a better deal”, what Greeks were voting for didn’t apply after June 30. This is because Greece defaulted on its €1.6 billion (£1.1 billion, $US1.8 billion) payment to the International Monetary Fund and the terms of the bailout were only valid up until that date.
This is not a trivial claim — it’s a technical and legal one. Like most deals, terms and conditions are presented to you on receiving the offer. A date is applied to your decision and you have a deadline to deliver your verdict.
If something massive happens, like say defaulting on payments from another loan you already have, this can also invalidate the offer in front of you.
Debt is not a guarantee of future payments in full. Rather, it is a risk that creditors take, in hopes of maybe being paid tomorrow.
The key word there is “risk.”
If you’re willing to take the risk, you’ll get a premium — in the form of interest.
But the downside of that risk is that you lose your money. And Greece just called Germany’s bluff.
That may have taught the creditors “a lesson” but that doesn’t mean it will improve Greece’s future. Who wants to lend to someone who can’t, or simply refuses, to give you your money back, or even work through how you can help repair the tattered remains of their balance sheet? It hurts the Greek credit rating too, making it even more expensive for the country to borrow money.
So from the outside, the markets and European politicians saw the call for a referendum as a diversionary tactic — Prime Minister Alexis Tsipras’ way of passing the pressure and the blame onto the Greek people when the country tumbles into a recession.
Post-referendum: “the Greek economy is now in much worse shape”
The banks have been loud and clear on this issue.
This week, Bank of America Merrill Lynch’s wrote a note titled “Greece: Time for the Adults to Speak.” Here is the key passage, which is worth reading in full:
The paradox is that Greece will now have to agree on a new program with the creditors, with tougher conditions than in the proposal that the referendum has just rejected. This is because the Greek economy is now in much worse shape following this week’s events, and particularly the closure of banks and the introduction of capital controls.
The economy will go back into recession, the fiscal targets will be even more out of reach, and banks are likely to need more capital. Negotiating and approving such a program will take time, while the Greek economy will be deteriorating.
Moreover, everything needs to be finalised in the next two weeks. Greece needs more loans to repay €3.5bn to the ECB on July 20. And Greek banks need an increase in the ELA, as they could run out of cash as early as this week. Therefore, the two sides will need to finalise a deal on a new program this week, and the Greek and European parliaments will need to approve it next week. Otherwise, a Greek economy starved for cash and a default to the ECB will increase substantially Grexit risks, in our view.
Essentially, now, Greece finds itself in an absolutely terrible position to get any sort of deal if it really, really wants to stay in the euro.
The referendum did not make its requirement to repay €240 billion ($US266 billion) of loans from Eurozone creditors and the IMF disappear. It still has to make those payments. Only now it has managed to cripple itself by taking itself away from the negotiating table, as Juncker put it.
Here is the timeline for Greece’s next set of payments:
July 20 is the next deadline for a debt payment but as Barclays’ analysts said earlier this week, it is unlikely to make this payment or others, as the country has run out of cash.
Barclays said in a July 5 research note that Greece will almost certainly default on its debt, maybe exit the EU, abandon the euro and therefore will re-adopt its old currency, the drachma and use IOUs to recapitalise its banking system.
This is hardly “progress” that was touted to be made by voting “No.” The “Oxi” vote pretty much has only succeeded in speeding up the process in pushing Greece out of the euro and isolating itself from the nations that funnelled cash into its battered balance sheet.
Greece can now only get a worse deal
But, Societe Generale’s Michala Marcussen reiterated in a note earlier this week, Greece will not leave the euro immediately:
The Greek government has already clearly indicated that it is not actively seeking to take the country out of the euro. We have long argued that the day the European Central Bank cuts off (emergency funding) ELA is de facto the day that Greece would leave the euro. At the same time, it is clear that the ECB has no appetite to front run the political process and as long as discussions are ongoing between the Greek administration and the euro area we consider it unlikely that the ECB would fully cut the ELA and Greek banks’ access to ECB liquidity facilities.
But whether the Greek government is not actively seeking to leave the euro or not, it looks like the referendum and the outcome will do just that. And even if it managed to stay in the eurozone, it is now almost impossible for Greece to get a deal that isn’t worse than what it voted against in the first place.