06 Jul 2015 08:11

12 Q&As on historic setback in Greece

Greece’s resounding “No” to new austerity measures means that uncertainty now has increased – both in Greece and the European Union. This will have a negative impact on global finance markets in the coming days, including lower share prices. Chief economist Robert Bergqvist answers twelve questions about the situation.

Greece’s resounding “No” to new austerity measures in Sunday’s referendum means there is less risk that the outcome will be interpreted in different ways. Meanwhile it indirectly demonstrates a worryingly large decline in support for the euro among Greeks. A new third bail-out package from international creditors is still possible but will depend on whether the Greek government is willing and able to compromise and control its pride. If Athens displays the same overconfidence in the coming negotiations as before, this will shut the door to a new crisis agreement, forcing Greece to introduce a parallel currency, the first step towards “Grexit” (leaving the euro zone). Uncertainty has now increased – both in Greece and the European Union. This will have a negative impact on global finance markets in the coming days, including lower share prices. There is now also a bigger risk that populist political parties in other euro zone countries will want to follow Greece’s bad example.       

1. What was the result of the Greek referendum?

At this writing (4 a.m. on Monday morning), most of the votes have been counted. Turnout was high: 63 per cent, well above the 40 per cent required for the outcome to be considered binding. 

Yes (“to austerity”) 38,7 percent

No (“ to austerity”) 61,3 percent

2. Is the outcome of the referendum actually valid?

Last Friday, Greece’s Council of State − the country’s highest administrative court – gave the green light to the referendum by declaring it constitutional. But opponents may question the validity of the outcome due to a) the short period (just over a week) between announcement and implementation of the referendum, b) the complex formulation of the question put to voters and c) confusion about what people were actually voting for or against, since the creditors’ proposal had already been withdrawn.

3. But the Greeks voted NO (“to austerity”): What will happen now?

The outcome gives the government of Alexis Tsipras a stronger negotiating mandate. How the prime minister and his finance minister manage this new situation will determine Greece’s future in the euro zone.

The positive scenario: Prime Minister Tsipras emerges from the crisis situation of recent days in a stronger position and now enjoys a mandate from the Greeks to pursue a tough approach towards the “troika” of international creditors. The troika has kept the door open for continued discussions, but not until the referendum was over. A new, third bail-out package may be offered to Athens, but reaching a final agreement is expected to take time, among other things because it will require the approval of various national parliaments.

The negative scenario: Tsipras continues to pursue his earlier unpredictable confrontationist policy, thus closing the door to a bail-out package via the troika and further liquidity aid from the European Central Bank ECB) after a few days. This in turn implies that Greece would be gradually forced to issue its own currency − the first step towards leaving the euro zone (Grexit).

4.  Why should the Greek government compromise?

The country is currently in an acute liquidity crisis and needs large-scale outside help. If he plays his cards right, Mr Tsipras can demonstrate success in two areas: he won the people’s “vote of confidence” and can also obtain both new bail-out loans and a debt restructuring.

5. Will Greece leave the euro zone?

In itself, the referendum actually provides no unambiguous answer to this question. The Athens government argues that Greece cannot be forced out of the euro zone and could ask the European Court of Justice to interpret the relevant EU treaties. Greece is probably right, although it is worth noting that the outcome of the vote can be regarded indirectly as a reduction in support for the euro among Greeks.

But the other 18 euro zone countries could act in ways – for example by cutting off various “lifelines” – that in practice would force Greece to move towards gradually abandoning the euro by introducing a parallel currency. German Finance Minister Wolfgang Schäuble has taken an interesting step by opening the door for a Greek “time-out” from euro zone membership. This scenario is probably more compatible with EU treaties, would make it easier for Athens to get the economy back on its feet and might be viewed as enabling the currency union to continue in (almost) the same form as previously.

6. What action will the ECB take now?  

The ECB can decide to immediately withdraw its entire emergency liquidity line of about EUR 90 billion from the Greek banking system. More likely, the central bank will wait until new discussions among the Eurogroup finance ministers and with the International Monetary Fund (IMF). The decisions that must be taken in order to determine Greece’s future − both in the euro zone and perhaps outside it − are ultimately political in nature. 

7. What will be the economic consequences?

Greece: The country’s economic recovery will be delayed due to the adverse impact of political uncertainty. If confidence in Greece’s political leaders is quickly restored, positive economic growth may resume, but there is a big risk that growth will remain negative in the short term.

Other countries: Greece represents a small fraction of the EU and global economies. Its performance will thus have a very limited direct impact on the growth outlook in Europe and the rest of the world.

8. What will be the financial consequences?  

Greece: Uncertainty about the Greek financial system is expected to persist for another while. A poorer economic performance would hurt the credit-worthiness of Greek bank customers. Meanwhile there is a major risk that after the imposition of capital controls, private individuals will continue to withdraw money from Greek banks. But in the short term, this is a headache for the ECB.

Other countries: Today any solvency and liquidity problems for Greece’s banks and government are mainly a threat to the euro zone’s central banking system and collective financial stability mechanisms (and ultimately, euro zone taxpayers). This limits the risks of contagion.

9. What will be the political consequences?  

Greece: The politicians in Athens will continue to face difficult choices in an economy that is facing an uphill struggle, both cyclical and structural. Broad political support for government crisis and reform policies will be necessary, and this will require a coherent political voice that communicates with the hard-pressed Greek people. Meanwhile Greece’s political leadership must quickly repair its damaged relationships with both the EU and the rest of the world.

Other countries: The EU and the euro project can hardly view the events of this past spring and recent weeks as a success. Critics may argue that the EU has intruded on the sovereignty of an individual country. Others maintain that this is part of the rule system that a country must adapt to as a member of a currency union. After all, the aim is also to eventually turn the euro project into a political union, which in practice will mean that national sovereignty will have to yield to increased federalism.

10. Will Greece be granted new financial relief?

The answer is yes, but not without a more cooperative attitude from Athens. This picture became clear even before the referendum. The question was instead through what channels new financial aid would be delivered: the euro zone’s various aid mechanisms and/or the EU’s stability funds and/or the IMF?  One alternative that has been ruled out is to let Greece collapse economically and politically, thereby adding geopolitical uncertainty to a part of the world already plagued by increased instability.

11. How will a possible third bail-out package look?

The main responsibility for providing a new bail-out to Greece is expected to rest with Europe, not with the IMF. According to new IMF estimates, Greece will need a new two-year financing package totalling about EUR 50 billion. In addition, the IMF recommends some form of debt restructuring, primarily by extending the maturity of loans.

12. Will Greek banks open on Monday?

The Greek government has already said that the banks will be closed on Monday, but there are many indications that they will remain closed for longer than this. Due to worries about Grexit and the imposition of new capital controls, private individuals are expected to continue withdrawing their deposits from Greek banks.