Greek Referendum Ends With a "No" Vote
Greek Prime Minister Alexis Tsipras got his wish on Sunday, as the Greek people voted "no" on the recent referendum. With a projected 61% "no" vote, Tsipras can go back to the negotiating table with a stronger hand — or so he thinks. Given that the vote regarded an austerity plan that had already been pulled off the negotiating table, what were the Greeks really voting on?
Tsipras contends that the vote was representative of the need to reject the current austerity plan and find a more humane restructuring of the massive Greek debt. Many Europeans seem to think the referendum is for continued membership in the Eurozone, and potentially the EU. We suspect most Greeks didn't know what they were voting for either, and some mixture of those viewpoints guided their votes.
Their confusion is understandable when the actual language of the referendum is read:
“Should the plan of agreement, which was submitted by the European Commission, the European Central Bank and the International Monetary Fund in the Eurogroup of 25.06.2015 and is comprised of two parts that constitute their unified proposal be accepted?
Got that? If you did, the IMF has a job for you. Joking aside, Tsipras expects to go back to the "troika" of the European Central Bank (ECB), the European Commission (EC) and the International Monetary Fund (IMF) with a stronger hand for negotiations. However, with Greece already in arrears/default on a 1.6 billion Euro payment to the IMF, does Tsipras really have any leverage at all? The ECB could cut off the monetary spigot at any time and wash their hands of Greece.
In the high-stakes poker game between Tsipras and the troika, Tsipras believes his metaphorical ace in the hole is the strong desire to hold the Eurozone together, and that it's greater than the troika's frustrations over the Greek attitude about the debt and method of negotiations. Over the next few weeks, it's time for the troika to fold (move toward the Greek position) or call, and start taking the steps that will likely send Greece out of the Eurozone.
Markets Down, But Not Out
Markets hate uncertainty, and it's hard to get more uncertain than the situation in Greece. Arguably, a "yes" vote would have given the markets an expectation that a deal would be reached. As of this writing, the "no" vote has produced "muted dismay" in the markets according to the New York Times, with the S&P 500 and the Dow down around 0.3% each after larger drops at the opening bell Monday. The Euro Stoxx 50 index fell by over 2% and the London FTSE 100 was closing in on a 1% loss.
Other reactions were equally predictable but not quite as harsh as some expected, at least not yet. The Euro is down against the dollar. Investors are moving back to bonds in the US and Europe, sending yields lower. Oil dropped below $60 per barrel on the expectation of a slowing world market and less oil consumption.
Most likely, the market is waiting to see what transpires over the next few days. Frankly, who in the financial community isn't?
Return of the Drachma?
Action over the next few days is critical for both Tsipras and the ECB. Tsipras must convince European officials to return to the negotiating table, and come with a proposal that maintains the anti-austerity theme yet provides debt relief — a very small needle to thread. Meanwhile, the ECB must decide whether or not to continue to provide emergency liquidity to Greek banks, which are expected to run out of money within a few days of reopening (at the last report delayed until Thursday, but in this chaos, nobody can be sure.)
The ECB is not in an easy situation either. Greek bonds are understandably crashing, with a yield approaching 50%. Since Greek bonds serve as collateral for ECB loans, the ECB has even less incentive to continue to keep the money flowing. Yet cutting off the liquidity flow would likely collapse the banking system and/or force the return of the drachma as a replacement or parallel currency. An almost certain devaluation would follow. In essence, Greeks would be imposing their own austerity by wiping out much of their own wealth and making much-needed imports terribly expensive.
In that scenario, the cost of doing business with Greece would plummet, theoretically reviving the tourism industry and making Greek products cheaper on the world market. Merchants and businesses that survive the initial shock could see reasonable growth. It's at least fair to ask if that path provides more growth and the ability to get out of debt faster than would the austerity program. Perhaps it’s the financial equivalent of debating whether to rip off a Band-Aid quickly or slowly.
Of course, if the fundamental economic reforms recommended by the ECB and IMF never take place, the growth is unlikely to sustain true economic recovery.
The Next Few Days
A meeting between the leaders of France and Germany, and an ECB meeting on Monday, will go a long way to determining whether Tsipras' gamble pays off in the short term. Most of the German government remains firm, while French leaders are showing signs of conciliation.
Meanwhile, the financial community is sending more conciliatory signals that the political community. Even hardline German Finance Minister Wolfgang Schäuble may be leaning toward some arrangement other than a "Grexit" sending Greece out of the Eurozone.
Schäuble told the Bild newspaper before the election that the Sunday referendum was a choice of sticking with the Euro or being "temporarily without it," adding, "…it is clear that we will not leave the (Greek) people in the lurch." That may suggest more of a temporary, controlled return to the drachma with the intent of intentionally rejoining the Euro.
How that would happen in practice is anybody's guess. To draw a European sporting analogy, it would be a bit like relegation in European football (soccer), where lesser teams are relegated to a lower tier until they are strong enough to rejoin the top tier. Unfortunately, the stakes are higher as this type of "relegation" comes at the expense of Greek wealth.
Greece has sent one conciliatory signal through the resignation of Yanis Varoufakis, the fiery Greek Finance Minister who alienated many in the negotiations with the use of words like "terrorism" to describe European financial policy toward Greece. As of this writing, a successor has not been named.
Still, the real work on reconciliation is yet to come, pending on the details of a new Tsipras proposal and the ECB liquidity reaction over the next few days. A hard line on liquidity forces all parties to make quick decisions, and increases the likelihood of poor ones.
The markets are reacting predictably so far, only with less volatility than was feared. Perhaps "Greek fatigue" is setting in, similar to the constant ups and downs of predicting the Federal Reserve's interest rate hike. While a "Grexit" seems more likely than it was, there is still a lot of inertia to overcome to a Grexit and no rules to follow. Meanwhile, all financial participants have incentive to find a workable solution.
During this chaotic period, it seems wise to be leery of euro-backed investments until the chaos settles. However, the market is still prone to collective overreaction, and those overreactions are not a bad time to go value shopping on solid stocks that have dropped as part of an overall temporary stock dip.
The perspective of Tsipras and the Greek people seems to be that while any path will be painful, the current path produced no economic light at the end of the tunnel. In the last five years, Greek unemployment has passed the 20% mark and the economy contracted by 25%. By rejecting austerity programs that cut into pensions without the promise of growth, how could it get any worse? We may be about to find out.