A snap referendum in Greece to accept or reject the latest offer from that nation’s creditors has resulting in a vote against the offer. While the count continues, it appears that the rejectionists will win 61% of the vote. The powers that be in Brussels and other European capitals pulled out all the stoppers to get the offer accepted. However, the Greek people have called the bluff. Now, negotiations can begin in earnest.
The problem of Greek indebtedness has been the major concern of Europe since 2009, and yesterday’s vote marks a shift in the nature of the problem. For the first few years, the problem was actually a problem of keeping the French and German banks that had loaned Greece billions from failing. Five years ago, a Greek default would have meant the collapse of the banking systems in France and Germany. Everything that was done in the early years of the crisis was designed to buy time to let those banks build up reserves, to remove the debt from their books and otherwise free them from the problem of Greece not paying up.
Now, the main creditors are the European Central Bank, the IMF and other European governments. Neither the ECB nor the IMF will go broke if Greece doesn’t pay up. That was not true for BNP Paribas and Dresdner Bank in 2010. The other European governments that are one the hook for the debt by way of the European Commission can weather the storm as well.
Moreover, the entire situation is fixable, and it has been fixable all along. The Greeks missed a payment of a €1.5 to the IMF on Tuesday, and it has another payment to the ECB due shortly of about €3.5 billion. More than €7 billion was ready to be released to Greece if a deal could have been struck. Those funds are still there, and it is merely a matter of the creditors agreeing to releasing the money.
Until the referendum, the creditors were able to made demands on the Greek government and people under the threat of cutting of the rescue funds. Now that those funds have been cut off, the creditors have nothing more to use in the negotiations. In an instance like this, the debtor is actually in a stronger position than before the default. When a creditor doesn’t get paid on time and in full, a certain flexibility comes to the fore.
That is not to say that things in Greece are now going to be rosy. In fact, they are likely to get pretty bad even compared to what the Greeks have suffered thus far. However, with youth unemployment approaching 50%, a lot of young Greeks began to wonder just what more they could be forced to bear. Voting no was the only way to break the cycle of depression in the local economy.
The banks are supposed to open on Tuesday, and without some help from the ECB, the Greek banks will run out of money soon and will have to close. There will be a load of cash in circulation that will keep the economy afloat. The nation won’t be able to import anything on credit, and imports paid for in cash will mean less cash in circulation. That in turn means deflation. Greece is self-sufficient in very little, so this is serious.
Prime Minister Alexander Tsirpas has a mandate now to negotiate a better deal for Greece. The creditors probably are in no mood, however, to engage in any discussions right away. The heads of Euopean governments will have to discuss their own local political situations and consider all the options before they have a common position to suggest. Mr. Tsirpas may find that he is the only one at the negotiating table for a while.
Be that as it may, eventually, the creditors will have to sit down and discuss things — if they ever want to see any of their money back.