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A Referendum Sounding Like A Ultimatum

Published 07/05/2015, 04:34 AM
Updated 03/09/2019, 08:30 AM

■ On July 5th, Greece holds a referendum on the latest proposals for an agreement on the financing program.
■ If the “No” wins, the situation will deteriorate further and the place of the country in the Eurozone will be endangered.
■ After a “Yes”, the worst will be avoided but challenges will remain.

Exactly at the point in time when Europeans were eventually acknowledging that an agreement was within reach, the decision by Prime Minister Alexis Tspiras to organize a referendum on 5th of July was a surprise and dramatically increased the risks.

Due to this decision, Europeans and the IMF have considered since then that negotiations were broken. The ECB had to freeze the maximum amount available for refinancing the Greek banks on ELA and, capital controls were imposed on 29th June. From July 1st, Greece has built payment arrears to the International Monetary Fund (IMF) and the second adjustment program from the European Fund for Financial Stability (EFSF) has ended, making its extension impossible and the remaining funds in this program (EUR 13.5bn) unavailable.

With another U-Turn, the Greek government asked Europeans late on Tuesday evening to consider the opening of a financing program from the European Stability Mechanism (ESM) covering its financing gap for the next two years. The situation is very confused but, at the time of writing, the referendum is expected to take place on Sunday.

Scenarios after a “Yes” and after “No”

Prime Minister Tsipras is calling for voting against an agreement with Europeans on the current basis of negotiations, pretending this would not trigger the exit of the country from Eurozone. The public support to the current government is still strong although it has regularly decreased since the arrival of Syriza in office and the lack of progress in negotiations. However, all available pools show the Greek public opinion is widely in favor of the country staying in the Euro. Other political parties (ND, Pasok, To Potami) totaling 38.6% of the votes in the last parliamentary elections in February, are calling for a “Yes”

This is the reason why this favorable outcome appears, at the time of writing, as the most likely. Such a vote would without doubt reopen the doors for negotiations with the Europeans (see table on next page). However, very large uncertainties would still prevail: For example, with the 2nd bail-out program ended and after defaulting to the IMF, it is unclear on what basis exactly negotiations could resume. Will IMF be back on the table? Would it be necessary for Europeans to go through all procedures for stepping up a fresh new program (vote by parliament, MoU, etc...)?

On the political side, PM Tsipras would be severely weakened after a “Yes” outcome, and would most likely not be able to resume talks with the same government and coalition. Available options include the formation of a national unity government, or the call for new general elections. This could also prove necessary to restore a more confident environment between the stakeholders, without which serious negotiations might not be able to succeed.

If the “No” wins, no options can be excluded unfortunately. In the worst case scenario, talks with Europeans would not resume. After defaulting on the IMF, Greece would default on the ECB on the 20th of July. ECB could then be forced to cut Greek banks access to ELA. This would trigger the need for resolution and recapitalization of the banking system, which the Greek government would be unable to provide without help from Europeans1. Issuance of parallel money could start on this occasion, or as soon as the Greek government would not be able to pay wages or pensions in euros. On this road, we would expect capital controls to remain in place for a very long time, and a major recession to take place in the country for several quarters. That said, le pire n’est jamais sûr* and one can easily imagine developments that would enable talks to resume even after a negative vote, either at the initiative of the current Greek government, or after a period of political instability triggered by the disorganization that lasting capital controls are going to impose on the economy. We should recall that, since 2010, the main point on which all stakeholders have continuously agreed on is the will to have Greece within the Eurozone.

Debt sustainability still has to be restored
Hopefully, negotiations will resume for an agreement on a financing strategy for Greece over the medium term. On these grounds, challenges will remain unchanged. Due to its size, debt sustainability is indeed, weak, despite all efforts made by Europeans to lower interest payments and smooth the redemption profile. Negotiations with the Syriza-led coalition failed mainly on the question of debt relief from official creditors.

The nascent recovery has now been derailed. The Greek economy fell back into recession and will print negative growth at least in 2015. This deterioration in the growth outlook reinforces uncertainty on the ability of the government to achieve high primary surplus targets. Due to the use of the threat of Grexit in the negotiations, we think that the sustainability of public finances and the growth outlook are even more linked than before. It is hard to imagine a sustained recovery (which supposes investments, the return of foreign investors, access to capital markets, etc…) if the deal does not remove rapidly uncertainty about the future of Greece in the euro. To do so, a major improvement in the sustainability of public finances is needed.

*”The worst is never for sure”

To Read the Entire Report Please Click on the pdf File Below

by Frédérique CERISIER , Jean-Luc PROUTAT

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