from Macro and Markets

From Greece, a Resounding ’No!’

"No" supporters celebrate referendum results in Athens on July 5, 2015.

July 5, 2015

"No" supporters celebrate referendum results in Athens on July 5, 2015.
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With around 60 percent of the vote counted in Greece, the No vote is 61 percent—a surprisingly wide victory for the Tsipras government. Fully 2/3 of young voters voted No.  What happens next?

1.  No major change in the deal on the table. Statements from European leaders in recent days showed a wide variety of views about whether a No vote in Greece would mark an irrevocable break with Europe. Outside Greece, it is easy to see this vote as a decisive call to exit Europe. Nonetheless, policymakers’ instinct is to leave the door to negotiations open, and it is my belief is that there is sufficient will on both sides to make one last effort to get a deal. But it will not come easily given the lack of trust between the parties and the still meaningful differences in policy measures that exist. Further, the policies that were voted on today have lapsed.  Any new package of policies and financing would need to be recreated and approved by all parliaments, which is a high hurdle.

European leaders will need to coordinate their position first; tomorrow’s meeting between German Chancellor Angela Merkel and French President Francois Hollande is just a first step. Last week’s IMF report calling for debt relief in support of strong policies adds to the debate but shouldn’t be over read—in the near term I do not expect to see much change in the deal on the table. If the Greek government believes, as they say publicly, that a “No” vote will allow them to have their way, they will be badly disappointed, and such hopes are an impediment to any deal.

2.  All eyes on the European Central Bank. The ECB meets tomorrow to review a request from the Greek central bank to expand emergency assistance (ELA). Without an increase, the banks cannot reopen and the ATMs will be out of currency by Tuesday. By the letter of the law, the ECB should not increase liquidity to now-insolvent Greek banks. Indeed, they should increase the collateral required for the liquidity they have already provided.  But if there was a time for forbearance, this could be it. A decision to increase the ELA by a small amount—perhaps €3-5 billion—would be seen as an important good-faith gesture and would keep the ATMs working for a few more days, during which one last effort to negotiate could take place. Once the euros are gone, the pressure on the government will increase dramatically and a decision to create a new currency could be days away.

3.  Large external debt payments loom, but it’s domestic payments that could force the issue. Much of the focus is on €3.5 billion owed to European institutions on July 20 as a decisive moment. But without a deal in the works the Greek government may have difficulty rolling over domestic debt that comes due on July 10.  In the end, its the domestic dislocations that will determine the path forward.

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