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Greek referendum is a watershed moment in Europe: response to the 'No' vote

Now that the Greeks have voted against proposals made by European creditors, what are the consequences for Greece and the EU? If Greece now leaves the EU and returns to the drachma, how will this affect global forex markets?
Sunday 5 July marked a watershed moment in Greece. The referendum on whether to accept or reject the measures imposed by creditors will have far-reaching implications for Greece and the European Union. The Greeks had an opportunity to vote on whether to accept the terms of the bailout programme. It is perceived that the decisive ‘No’ vote will spur a series of measures that could be detrimental to EU unity.
This is the timeline that led up to the referendum:

  1. Greece missed a €305 million loan repayment to the IMF on 5 June
  2. Greece attempted to sell Treasury bills worth €1.6 billion to refinance debt on 10 June
  3. Greece owed the IMF €312 million on 12 June
  4. Greece owed the IMF a loan repayment of €573 million on 16 June
  5. Greece owed the IMF a loan repayment of €343 million on 19 June
  6. Greece owed the ECB €85 million for bonds purchased by the central bank
  7. Greece owed €1.5 billion in wages and pensions by 30 June and the bailout deal expired

There is the likelihood that a banking collapse may ensue as emergency funds dry up as Greeks continue to withdraw their funds from banks. The IMF announced that Greece required debt relief of €50 billion to meet its financial obligations, failing which the country will spiral into an even more severe economic crisis. A Greek exit – a Grexit – could result in shockwaves being spread across the EU, causing additional countries to consider leaving the euro.

Prime Minister Tsipras abruptly changes direction

The far-left Syriza party in Greece, led by Prime Minister Tsipras, urged fellow countrymen to reject international proposals for a bailout. His message was unequivocal: reject punitive measures imposed on Greece by the Troika – the IMF, ECB and the EC. The harsh measures adopted by these institutions have resulted in strong feelings of resentment within Greece, spurring the election of Prime Minister Alexis Tsipras.
While Tsipras appeared to be willing to go along with certain aspects of the Troika proposals, he abruptly changed direction in local media addresses. Tsipras was elected on a mandate of standing firm against further austerity measures; his electorate rejected the harsh measures being imposed on Greece by the Troika vis-à-vis austerity. The about-turn by Tsipras flies in the face of the letter he wrote to European creditors requesting new bailout terms.
According to Tsipras the punishing measures being imposed on Greece were not in his country’s best interests. As a result, he called on Greeks to vote against the imposed terms and conditions. Additionally, Tsipras was firmly against delaying the referendum on Sunday 5 July 2015. This shows strong political will and a seemingly large degree of ideological unity.

Is a Grexit a real possibility?

According to EU officials and opponents of the Syriza party, a no-vote could have dire consequences for Greece’s membership of the EU. Should a rejection of Troika creditor proposals lead to a Grexit, it may signify a return to the drachma and a domino effect among other European countries. However, the flip-side of the coin is that government officials see this position as nothing more than trying to drum up fear in Greece.
The uncertainty created by Greece’s debt default and subsequent downgrading in the international credit markets has left many investors on tenterhooks. Yesterday’s referendum was therefore watched with a mix of trepidation and expectation. Now the Greeks have voted against the measures imposed by the Troika, a Grexit will likely ensue. This could spark further concerns for the fragile EU which has to contend with other nations likely to follow the Greek paradigm.
As it stands, the European Union recovery is a fragile one. The global recovery is equally unstable, and the shock of a Grexit could plunge global markets into the red. The euro has hit multi-year lows against a basket of currencies in 2015 and fears of a Grexit, Frexit, Brexit or other scenarios arising will not bode well for confidence in the fragmented and disparate European Union.

What is likely to occur following a Grexit?

The two most obvious outcomes for a Grexit would be massive capital flight from Greece and the eurozone, and the likely return to the Greek drachma. The failure of the Troika to ease up on its debt repayment requirements will likely see the Greek government establish a nationalised system of banking with an alternative means of repaying debts and managing the country’s finances.
The Greek government would then be required to impose stringent measures in its own financial system to prevent the collapse of the Greek banking sector. The withdrawal of European Central Bank support from the Greek banking system would have dire implications for Greek financial stability. If Greece decides to repay its debt obligations by simply printing money, massive unemployment and inflation could result. However, Greece presently has around 20% unemployment meaning that there is sufficient excess capacity to turn things around.
Brett Chatz
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The content of this article is the personal opinion of the author and not The information and comments provided herein under no circumstances are to be considered an offer or solicitation to invest. Nothing herein should be construed as investment advice. The information provided is believed to be accurate at the date the information is produced.

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