Greece overwhelmingly voted “No” — or “OXI” — in the country’s bailout referendum Sunday.
But while the nation rejected its European creditors’ demands that were made prior to June 30 in the hope of getting a better deal, the “No” vote has actually put the country in a worse situation, says Bank of America Merrill Lynch.
In a note today entitled “Greece: Time for the Adults to Speak,” BAML’s analysts pretty much say the “No” vote was pointless, as all it did was make the country’s economy worse.
That means Greece is even more desperate for cash than it was before the vote and therefore in a much weaker negotiating position. It defaulted on its €1.6 billion (£1.1 billion, $US1.8 billion) payment to its creditors on June 30 and has another payment due to the European Central Bank coming up later this month. ATMs are close to running dry.
Here’s the key passage from BAML’s note, 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 ust 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.
So in other words, Greeks voted against a conditions of a bailout that would allow Greece to not default, allowing it to have the ability to keep on borrowing and negotiating on conditions.
Instead the “OXI” vote has led it to be in a worse financial state that it was before, meaning conditions it would now have to negotiated are significantly worse than before the referendum was announced.
Barclays, as well as other banks, say Greece is now highly likely to abandon the euro — a Grexit — and will use the drachma and IOUs to recapitalise its banking system, which is already nearly out of cash.
But Prime Minister Alexis Tsipras has been adamant in his support of Greece staying in the eurozone and Finance Minister Yanis Varoufakis was reportedly pushed out for suggesting the country could use an alternative currency.
If Greece is committed to staying in Europe then its economic desperation means its creditors hold pretty much all the cards in negotiations and will likely drive a hard bargain — just what the Greek people rejected.