27 June 2016

Summary: It is hard to see many positive outcomes from here. No matter what, capital controls and bank holidays will likely be needed in the short term (and possibly longer) in Greece. Even if the referendum gives a positive outcome, this may still provoke uncertainty. It is not clear whether the deal to be voted on is actually still on the table. Furthermore, Tsipras has set himself up to reject the proposal, so it might be hard to avoid new elections if the people back the creditors. If there is a ‘No’ vote, this is likely to be seen as a vote for Grexit, since any offer on the table from creditors will be a ‘take it or leave it’ one. There remains a small chance that the referendum may not come to pass, if a new deal is offered or the bill is not approved by the Greek Parliament or President. However, given Tsipras’s insistence on the referendum, it would again be hard for him to survive such an event.

What will the Greek referendum be on?

This is the first question that comes to mind. Tsipras said in his speech that:

The question on the ballot will be whether the institutions’ proposal should be accepted or rejected.

It seems that the question will be whether to accept or reject the latest proposal which was tabled by creditors at the Eurogroup meeting on Thursday 25 June (parts of which can be seen here). However, this has created some confusion, given that the bailout will expire on 30 June. Tsipras said in his speech that he “will ask for a short extension of the programme – in writing-  from the leaders of the EU and the institutions”, presumably until just after the referendum to allow it to take place, and for the bailout programme to still be valid. All this said, it is hard to see the referendum as on anything beyond ‘Yes’ or ‘No’ to Eurozone membership (more on this below).

How has and will Europe respond?

Firstly, it looks as if today’s Eurogroup meeting of Eurozone finance ministers will still go ahead and Greece will attend. However, reports already suggest it may be more focused on contingency planning than negotiations with Greece. In any case, the response of the rest of Europe will be crucial.

There are already reports flying around that the creditors have withdrawn their current proposal (on which the vote is due to be held). Clearly, they do not wish to be bullied. However, it remains unclear whether they will submit a new, possibly longer term and more extensive, plan to Greece at today’s meeting. Furthermore, it is far from certain that they will agree to extend the bailout programme until the referendum takes place – not least because, as we have discussed before, an extension of any form requires unanimous approval and ratification in some Eurozone parliaments. If this does not happen, the whole process becomes far more complicated. The vote, if it were still to go ahead, would then essentially be on the prospect of restarting negotiation and/or renewing the bailout.

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As we have explained before, the ECB is a crucial player in all of this. It now faces a choice as to whether to continue to allow Greek banks to tap the Emergency Liquidity Assistance (ELA) which has helped keep them afloat as deposits have been withdrawn (see chart above). The ECB has always said that, as long as there is a realistic prospect of a deal, it will continue to provide liquidity. It does not want to be the one to cut Greece off and precipitate a Grexit. That said, if the deal is not extended and the proposal is withdrawn, then it will be incredibly difficult for the ECB to allow the liquidity provision to continue.

Interestingly, amongst all this, German Vice Chancellor Sigmar Gabriel responded relatively positively saying that the referendum should not be “dismissed” and that it “could make sense”. It remains to be seen if German Chancellor Angela Merkel shares his view (we expect not).

What happens next?

The Greek parliament convened at 10am BST to approve the legislation to hold a referendum. Opposition parties have already voiced their objection to the plan. New Democracy said Tsipras was setting up a “rift” with Europe, To Potami said he was pushing the country “over a cliff” while Pasok called on him to “resign” and call elections. Despite this it seems likely that the government will be able to push the bill through. But there remains a small chance though that the referendum will not happen, if it did not get through the parliament, if the President refused to sign off on it or if (out of the blue) creditors offered a more acceptable deal.

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More importantly though it is hard to see how the referendum can happen without capital controls being put in place. There were numerous reports overnight and this morning of long queues forming at ATMs. Given that deposits have been withdrawn at a record pace in the past months, it is hard to see this stopping (see chart above). As such, capital controls and bank holidays may be needed to manage this – especially if the ECB is unwilling to further increase the limit on ELA, as seems likely. If the ECB does cut off the ELA then I would think all bets are off. I can’t imagine the banks would even be able to open in such a scenario now. It is thought that the Greek government will hold talks with the ECB today, presumably around how all this will be handled.

What would a ‘Yes’ vote mean?

The first important thing to note is that Tsipras seems to be setting himself up to campaign against the proposal of the creditors. The language in his speech was very tough. He said the proposal would boost “social inequalities” and that it amounted to the “humiliation of the Greek people”. His position could not be clearer when he said:

I call on you to decide – with sovereignty and dignity as Greek history demands – whether we should accept the extortionate ultimatum that calls for strict and humiliating austerity without end, and without the prospect of ever standing on our own two feet, socially and financially. We should respond to authoritarianism and harsh austerity with democracy – calmly and decisively.

Greek Prime Minister Alexis Tsipras, 27 June 2015

Given his categorical position, it is hard to imagine him continuing as Prime Minister if there is a ‘Yes’ vote. As such, he may be forced to resign with a government of national unity or a technocratic government taking over in the short term before new elections are held as soon as possible. However, this could be tricky in purely practical terms due to the parliamentary majority of the current coalition government. Of course, this is not a recipe for stability and would add to significant confusion – further pushing the Greek economy downwards as people and businesses wait to see on the outcome. Furthermore, even if elections are held, there is (based on current polls) a good chance Syriza would win again. Where this would leave us in the negotiations is entirely unclear.

Of course, as noted above, all this depends on exactly what is voted on and if there is a clear proposal on the table. If the bailout has expired, then a vote in favour of the creditors would probably mean returning to the table and striking a new deal. However, there will be little negotiation as Europe would likely see this as a vote to accept whatever they offer. This may take some time, during which capital controls would have to remain in place and the economy would slip further into recession.

What would a ‘No’ vote mean?

It is very hard to see this as anything but a vote for Grexit. Whatever offer is voted on or whatever is seen to be voted on, there is no doubt that this is a ‘take it or leave it’ offer. It seems very unlikely that in the event of a ‘No’ vote that the creditors would produce a different offer.

The exact process towards Grexit is far from clear (see here for more detailed thoughts). However, in the event of a ‘No’ vote, the ECB would have to cut off the ELA to Greek banks, if it had not done so already. This would precipitate the need for Greece to begin printing/creating its own currency to help fund Greek banks and avert a financial collapse. Greece would also default on its IMF payment and eventually its 20 July ECB payment. Theoretically, Greece could live in a limbo inside the euro with capital controls in place and some kind of parallel currency circulating. But the question we have to ask is: why?

In the end, living in such limbo would be incredibly painful for the Greek economy. Furthermore, it would mean doing so without a clear end game in sight. Unless this situation is simply buying time for a new government to come into place and resume some kind of bailout with the creditors then there seems to be little benefit. As such, a ‘No’ vote would probably precipitate a Grexit.

Update 20:30 BST 27 June 2015

All meetings have now wrapped up along with the main press conferences. Earlier this afternoon the Eurogroup confirmed it would not be granting the programme extension to allow time for the referendum. This seems to be because it thought it strange that the Greek government would back a No – a very negative approach. It also suggested it did not trust the current government to fully implement a Yes after backing a No. As explained above, it remains unclear exactly what will be voted on at the Greek referendum, once the current package and proposal expire on 30 June.

Greek Finance Minister Yanis Varoufakis was unable to answer this question in his press conference. In the end the dynamics remain as described above. A Yes would likely require a new government and new talks on a bailout deal. A No would have very uncertain consequences since no other deal would be forthcoming and may result in a Grexit. Eurogroup Chief Jeroen Dijsselbloem did hint at a hope that the Greek Parliament would convince the government to turn back on the referendum decision.

German Finance Minister Wolfgang Schäuble struck a very pessimistic tone in his press conference and warned on the need for capital controls (as we did above) and that “not all [Greek banks] are able to fully operate now”. Irish Finance Minister Michael Noonan echoed this saying “It’s not a question of waiting to see what might happen on Monday in Greece in terms of crisis. The crisis has commenced.” He added that Monday “could be a bank holiday” in Greece. French Finance Minister Michel Sapin was a more optimistic and hoped that Greece would return to the negotiating table.

There was little detail on what was discussed in the second Eurogroup meeting (without Greece) but a reiteration of the political commitment to safeguard the Eurozone and the consensus that contagion would be limited. It seems very likely though that plans around Grexit were discussed and also plans for potential deeper integration to respond to fears over the Eurozone’s integrity in such an instance.

Attention now turns almost entirely to the ECB (with one eye on the Greek parliament) which will tomorrow hold a call to discuss the provision of ELA to Greek banks. This could be a turning point in the whole crisis and will likely determine if Greek banks open on Monday.