Monday, June 29, 2015

Greece update

The Greek Prime Minister Alexis Tsipras surprised everyone at the weekend by calling for a referendum on the latest proposal from the bailout institutions (the troika).  The referendum was approved by the Greek parliament and will ask whether the electorate supports the latest proposal from the institutions.

The relevance of such a referendum, to be held on Sunday July 5th is in question given it will come after Greece’s scheduled €1.5 billion payment to the IMF on June 30, which is likely to be missed without access to the funds available under the current bailout agreement.  It seems the referendum can only be legitimised if the IMF allows Greece to be in "arrears" until the outcome of the referendum is known. The bailout institutions rejected a call from Athens over the weekend to grant a one-month extension to the current bailout.  Patience is clearly wearing thin. 

Mr Tsipras has said he will campaign for a “no” vote.  This could put him at odds with electorate.  The Greek people will likely see this vote for what it is: a referendum on continued membership of the euro zone.  Various polls have suggested the Greek people want to stay in the euro zone, even if it means more pain.  If they are consistent, a “yes” vote will likely prevail which would hopefully then open the door to fresh negotiations.  But it’s hard to see how Mr Tsipras could then continue to negotiate on behalf of the Greek people and fresh elections could be called.  A “no” vote seems likely to put Greece on the path to exit from the euro zone.

With no resolution over the weekend the Greek banks will be closed on Monday, capital controls have been introduced and the European Central Bank has suspended Emergency Liquidity Assistance to the banks.  Greece is already getting a taste of what life outside the euro zone may look like, and it’s not good.

At this point it’s probably worth repeating that if Greece is forced out of the Euro the only good news is the rest of Europe is in far better shape now than in 2010-12 with Portugal and Ireland now both off bailout support, peripheral countries have reformed their economies and reduced their budget deficits and the ECB has built and strengthened the financial firewalls around the euro zone.  But that doesn't stop us from hoping they don’t need to be tested.