July 7, 2015
The Greek political and economic crises have entered a harrowing new chapter. Negotiations between Greece and its creditors broke down at the Eurogroup meeting on June 25th. The next day, the Syriza government surprised the creditors by calling for a popular referendum on July 5th, to decide on the draft agreement that had been submitted by the European Commission, the European Central Bank and the IMF. The referendum questions were framed in a confusing manner, leading to a week-long debate on what voters were really voting for. The Greek government argued that a No vote would strengthen its negotiating position and would allow it to renegotiate the terms of a new program. The opposition in Greece, and most external stakeholders, campaigned for a Yes, noting that in the case of a majority in favour of No, the result would pave the way for a “Grexit” from the European Union. Accordingly, they argued that the only way to avoid this outcome would be to accept the proposed terms of the agreement.
Throughout last week the debate monopolized global attention (to the extent that it overshadowed another evolving threat to the world economy, the ongoing meltdown of the Chinese stock market) and underscored how polarized the positions had become. To make things even more complicated, Greece also asked for a one-month bailout extension, which was swiftly denied by the Eurogroup. By June 30th, not only had the previous bailout program expired, but Greece went into arrears vis-à-vis the IMF, as it was not able to pay the EUR 1.5 billion due on that date – a first for a developed country in IMF’s history. These developments meant that the referendum asked Greeks to vote on a deal that is no longer on the table. Moreover, it implied that independently of the outcome of the vote, a new round of tough negotiations lies ahead (a new bailout will require not only agreement among Eurogroup members and the involved institutions, but also parliamentary votes in several countries, including Germany).
In the days before the referendum, most polls suggested that the result was too close to call. Finally the No vote prevailed by a large margin. The sad reality, however, is that neither outcome was likely to reduce uncertainty and stop the economic pain in Greece. As I had said in a previous article
, “as long as international creditors deny the need for another major debt restructuring and Greek authorities continue to play the populist card of making promises that cannot be implemented” there will be no solution to the crisis.
It is true that if the outcome of the referendum had been different, it might had ended the capacity of Syriza to continue to push for a confrontational approach that has no chance to succeed in the current circumstances. The problem, however, is that in either scenario it would have taken time not only to rebuild trust among the negotiating parties, but also to agree on another major debt restructuring, something that the IMF has already acknowledged as inevitable in its latest debt sustainability analysis released last week.
In the interim, markets will continue to test the resilience of Greece’s financial sector. The bank holiday and the introduction of capital controls last week were just the prelude of what is in store. The government has argued that banks will be reopened shortly (by 7/7 according to now ex-Minister Varoufakis). This is unlikely to happen, unless the ECB is willing to issue more liquidity to the Greek banks under its Emergency Liquidity Assistance (ELA) program. The fly in the ointment is that the ELA is supposed to be available as a lifeline for solvent banks. In other words, it is designed for illiquid, but solvent banks, and right now there are serious doubts about the solvency of the main Greek banks. Hence, how the ECB’s governing council decides to proceed with respect to the ELA pipeline will be the next key variable in determining the following phase of the crisis.
If the ELA is not expanded, most likely Greece will either have to adopt a Cyprus-like solution (i.e., to bail-in depositors, imposing a haircut on deposits above a certain threshold to shore up the banks), or it will have to introduce an alternative currency. The last option would be tantamount to a Grexit. To make things even more interesting, there is no consensus on what the legal implications of a Grexit would be for Greece’s membership in the EU. Most analysts, however, believe that Grexit would require a parallel withdrawal from the EU. In sum, there is just one certainty at this stage: the traditional prayer expression of Christian liturgy, Kyrie Eleison (“Lord, have mercy”), is more appropriate than ever.
Carlos A. Primo Braga is Professor of International Political Economy at IMD, and Director of The Evian Group@IMD. He teaches in Breakthrough Program for Senior Executives (BPSE), the Orchestrating Winning Performance (OWP) program, and also the IMD-CKGSB Dual Executive MBA.