GREEK REFERENDUM - "NO" WIN PUSHES EU INTO UNCHARTERED WATERS
By Ruma Dubey
“ We would rather go into deep waters and face the risk of drowning than get eaten alive by the sharks”
That in a nutshell described the psyche of the people of Greece when they voted with an overwhelming majority of “NO”.
This was like Cameron’s win in Britain – no one had expected him to win and that too with a landslide victory but when people went to vote, they voted for what they felt strongly. So the Greek have made history, preferring to kick away the offer of the European Union, saying that they no longer wanted to live in austerity and were ready to face the repercussions. This is a moment of truth for Tsipras too; he has managed to call the bluff on the EU but now we need to wait and see if banks do open up on Monday because if they do, there might be no money to give.
So what happens now? For one, the exit of Greece from the Eurozone currently does not seem like an immediate possibility; Europe will do anything to prevent that from happening. Tonight’s victory of the people of Greece might have made the Irish, Portugese, Italians and Spanish rethink their options too. They accepted the offer of EU and are currently undergoing major austerity measures. Especially in Spain, where unemployment is over 20%. Thus the risk for Europe is that if they let Greece go, Spain and others could get emboldened to do the same. For now the measures will be all about not allowing Grexit.
That means we are looking at the possibility of another deal from the creditors. And if these negotiations come to naught, it could a new Govt or another referendum and if that goes through, it could lead to the next bailout for Greece. But at this juncture when the Greek has rejected the offer of the creditors, who did not seem to be in any conciliatory mood, sitting down at the table and negotiating again, seems like a really tough task, at least as of now. But if the option is to try and see if one last attempt could help prevent Grexit, then they might relent.
On the other hand, if the first re-negotiated deal is rejected after this referendum, the EU could give them another deal upon hard negotiations and that could lead to an interim deal and then another bailout. But remember, Greece remains stuck in a thick morass – deal or no deal, by July 20th, Greece would need to repay around 3.5 billion Euros in bond redemptions for securities held by ECB. And before that, as early as 10th July, Greece will need to refinance 2 billion Euros in T-Bills and on 13th July, IMF loan repayments totaling about 450 million Euros will also become due.
Well, as we said ealier, deal or no deal, we cannot help but wonder where the money will come for another bailout. IMF has already gone on record to say that it does not have any more money to fund Greece debts and the ECB has little reason to once again extend billions when voters have snubbed them.
On Monday, Greek banks might have to stay shut and that will mean a major national crisis on hand as the country is running out of food and essentials as there is no money to pay for the imports. This could mean depositors will be bailed in and that means huge wealth being wiped out further. There is also talk of Greece issuing IOUs and bringing in a new physical currency, while re-denominating Greek bank accounts to drachmas. So there are chances that the debt owed to EU creditors could get abandoned thus pushing huge losses on the books of ECB, IMF and the others. And yes, the arrival of drachma could lead to a total crash in the value of the money held, leading to hyperventilation and chaos.
There is also talk that Greece could be “suspended” as a EU member and it could be given the promise of a “return” only if repays its debt or fulfills other laid out conditions.
Merkel and Hollande are scheduled to meet today and decide the future course of action. While we posted this story, news was the Tsipras had hit the phones, busy talking first with Hollande and other European leaders; Mario Draghi, the ECB President was also contacted. So looks like work is on for a new deal.
Yes, it is uncertain times and this will be a long saga. It would be best if the creditors eat humble pie and drink up the snub of the “NO” and get back to re-negotiate. Germany and France have to realise that they need to prevent a crisis blowing up on their face and give Greece the much required debt relief package. And despite their dislike for Tsipras and his Leftist ideals, his victory once again has shown the following he continues to have in Greece, especially the youth. The EU, if nothing else, needs to respect that!
As of now, it is all unchartered waters; no one really knows where this will head. The Indian markets are expected to remain weak as the dagger of this uncertainty will dictate the movement of the indices. We will not be directly affected but this is a huge geopolitical event, a truly historical moment in recent times thus we are sure to remain under a cloud.