Greece says ‘no’ in bailout referendum. What happens next?

If Grexit is to be avoided, Greece needs some kind of a deal. And soon.

July 06, 2015 10:42 pm | Updated November 16, 2021 05:24 pm IST - FRANKFURT

Elderly people argue with a bank worker as they wait to be allowed into a bank to withdraw a maximum of €120 ($134) for the week in Athens on Monday. Greece’s Finance Minister Yanis Varoufakis has resigned following Sunday’s referendum in which the majority of voters said “no” to more austerity measures in exchange for another financial bailout.

Elderly people argue with a bank worker as they wait to be allowed into a bank to withdraw a maximum of €120 ($134) for the week in Athens on Monday. Greece’s Finance Minister Yanis Varoufakis has resigned following Sunday’s referendum in which the majority of voters said “no” to more austerity measures in exchange for another financial bailout.

Greece is at the last chance saloon, thirsty and out of credit. Next stop could be the badlands of euro exit.

Without a deal on more bailout loans, the heavily indebted country faces looming financial hurdles in the coming days.

If it stumbles, it could leave the shared currency in a chaotic mess. A >resounding “no” vote in a referendum on Sunday on the tough conditions attached to more loans leaves Athens at odds with its main creditors the other eurozone governments, led by Germany.

“Greece is in limbo and is sliding fast toward Grexit,” said Berenberg Bank economist Holger Schmieding, using the shorthand for Greek exit.

What happens first?

The politicians will try to restart bailout talks not easy, after Greek voters rejected the last formal offer from the creditors. Meanwhile, the creditors’ resistance to softening terms remains high. There are concerns that rewarding Greek obstinacy will mean it and other indebted countries that need financial assistance will also resist spending cuts and economic reforms in the future.

Greece, which overspent for years until its troubles became clear in 2009, has already been granted €240 billion in loans from the other eurozone countries. But the spending restraint demanded as a condition for the loans hurt economic growth, and reforms to make Greece more business-friendly have been slower than hoped.

Chancellor Angela Merkel from Germany meets French President Francois Hollande on Monday evening. That’s followed by a meeting of eurozone finance ministers on Tuesday, and a full summit of the leaders of the 19 euro countries that evening.

After months of talks, the basic issues are well known, so the rejected deal, with tweaks, could serve as a basis for some kind of agreement.

Greece’s previous bailout line of credit expired June 30 before a deal could be reached to tap the last payout. So, a new one will have to be negotiated. That could take time. Germany’s parliament, for instance, would have to vote to approve a new negotiating mandate just to begin. And time is short.

Mr. Schmieding said any new offer to Greece “will be at least as tough as the offer Greece rejected.” That offer included painful increases in value-added tax paid at the point of sale by consumers, and reductions in state pensions.

James Nixon, chief European economist at Oxford Economics, says there’s “a narrow trajectory from here that sees an emboldened Greek parliament accepting the need for reform in return for a debt write-down.”

“The next 48 hours will be crucial.”

What happens while we wait for talks to get started again?

The most pressing question is the country’s banks, which closed a week ago after the European Central Bank refused to let them tap more emergency credit. Banks needed the credit to replace deposits as Greeks pulled their savings out, fearing it would be lost in a bank collapse or changed into a new currency that is worth less.

ATM withdrawals are limited to €60 ($66) a day to keep banks from collapsing. Suppliers are demanding business pay cash up front, making normal commerce impossible.

The banks have barely enough money left to meet limited withdrawals. The ECB is to review the situation on Monday, but likely won’t turn the tap back on unless it is convinced Greek banks are solvent and it’s not pouring taxpayer money into a black hole. The banks’ health depends on the government’s finances, since the banks hold government bonds and much of their capital consists of future tax breaks money that vanishes if the government goes bankrupt.

So the ECB may wait on the politicians to see if a bailout deal for the government takes shape. The bank’s preference is for the politicians to come up with a solution.

The ECB faces tough choices. It doesn’t want to pull the plug on Greece. But it doesn’t to pour in more money only to lose it.

Mr. Schmieding says for now the ECB “will play a holding game.”

And after that?

Perhaps the biggest drop-dead date is July 20. That’s the day Greece must pay €3.5 billion on a bond held by the European Central Bank. If it doesn’t pay, the ECB could withdraw all the emergency credit, collapsing Greece’s banking system.

Many analysts think that would result in Greece leaving the euro.

If the government defaults to the ECB itself, the thinking goes, it would be impossible to deny the government is bankrupt. And that could extend to the banks that are tied to it.

In that case, the ECB could not only cap its credit, as it has done so far, but withdraw the existing 89 billion euros it has already extended to Greek banks. With the banks broke, the ECB’s supervisory arm would likely order that they either be wound down or saved with new investment.

Yet Greece doesn’t have enough euros for a bank rescue. So, barring a deal with creditors to refloat the banks, it would have to print a new currency.

So they’ve got until July 20?

Not necessarily. The government is running out of euros to pay its regular bills such as paycheques to government employees and pensions. If it starts handing them IOUs instead, that could be the first step toward a new currency. It would take months to actually print new money and get it into circulation.

Meanwhile, every week the banks are closed the recession gets worse, tax revenues fall, and the amount of help Greece will need rises.

If Grexit is to be avoided, the country needs some kind of a deal.

And soon.

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