This post has been written by Morningstar's economist Francisco Torralba.
After four months of bargaining, in late June Greece and its creditors – the European Commission (EC), European Central Bank (ECB), and International Monetary Fund (IMF)– had not reached an agreement. The existing programme would expire on Tuesday, June 30. If creditors didn't approve an extension, a whole new deal would have to be drawn. That would take weeks, during which Greece would have to stand financially on its own. Moreover, Greece would miss a €1.5 billion payment to the IMF. This default might, in theory, trigger a cross-default clause by European creditors, forcing a "Grexit."
June 30 drew closer, but a deal did not. Predictably, the "Grexodus" of bank deposits intensified. During June, Greek banks had been able to meet the rush of withdrawals thanks to an extraordinary liquidity line--the Emergency Liquidity Assistance (ELA) programme--from the European Central Bank, with a limit of €89 billion.
Over the last weekend, a chain of events catapulted Greece into the next phase of the crisis. In this commentary, I review how Greece got here, what the referendum means, and possible scenarios post-July 5.
A Hectic Weekend: The Timeline
Friday, June 26
The latest proposal for a bailout extension emerges. Creditors offer to stretch the programme through November and release funds by June 30, in time to make the payment to the IMF.
Greece rejects the creditors' proposal, and Prime Minister Alexis Tsipras leaves Brussels for Athens.
Tsipras holds an emergency meeting with his cabinet in the evening. He announces that the package of assistance and austerity measures offered by the creditors will be put to a popular vote. The referendum will take place on Sunday, July 5.
Saturday, June 27
The Greek parliament debates the referendum announced by Tsipras.
Greece asks the Eurogroup of finance ministers for a bailout extension of a few weeks, so as to allow the referendum. Europe turns down the request.
Sunday, June 28
The Greek parliament votes on, and approves, the referendum. Opposition parties vote largely against the proposal, but Syriza and its coalition government partner have enough votes to get the referendum through.
The ECB announces that it keeps, but does not raise, the existing emergency liquidity support for Greek banks.
Tsipras says that Greece's central bank has been forced to call a "bank holiday" and to effect capital controls. Banks will be closed; cash withdrawals will be limited to €60 a day; and Greeks will not be able to transfer money overseas. The Athens stock market will not open on Monday.
The EC publishes a 10-page list of the proposals made by creditors to Greece before Athens allegedly broke off the negotiations on Friday.
Monday, June 29
Greece releases the exact wording and format of the referendum ballot.
Tuesday, June 30
The Greek government proposes a fresh 2-year bailout program, under the European Stability Mechanism. The new deal would come with a restructuring of debt, and it would exclude the IMF.
The Eurogroup of finance ministers rejects Greece's request for a third bailout.
Late in the evening, Prime Minister Tsipras sends a letter to Brussels accepting most, but not all, of the creditors' conditions, on which the referendum was to be held. He reiterates his request for an extension of the now-expired bailout programme, and for a new, third rescue programme worth €29.1 billion.
Greece misses the €1.5 billion payment to the IMF. Greece is officially in arrears with the fund and can only receive new financing after the missed payments are made.
Sunday, July 5
The referendum will be held.
Monday, July 20
Two Greek bonds totalling €3.5 billion are due. The bonds are held by the ECB.
That Tiny Canyon
Greece and European leaders continue to talk as I write these lines, and a deal could still happen before the referendum on July 5 – although it's unlikely. That's too bad, because the positions of each side are remarkably close. What separates them is a canyon of mistrust.
In the June 30 offer by Tsipras, he made concessions on the value-added tax, corporate tax payments, defense spending, pensions, collective bargaining clauses, and privatization of the national power company.
The proposal, however, was subject to "amendments, additions or clarifications." These possible changes would presumably touch on the same sticking points that have precluded an agreement in past weeks: retirement age and a lower VAT on the Greek islands. Germany, probably fearing that Greece would backpedal if they sit to negotiate, quickly dismissed Greece's offer.
Next Step: OXI or NAI
As I type these lines, Tsipras seems committed to holding the referendum. The outcome is anyone's guess. To begin with, Greek voters will face a puzzling question. The only English translation I've seen reads:
"Should the plan of agreement be accepted, which was submitted by the European Commission, the European Central Bank, and the International Monetary Fund in the Eurogroup of 25.06.2015 and comprises of two parts, which constitute their unified proposal? The first document is entitled 'Reforms For The Completion Of The Current Programme And Beyond' and the second 'Preliminary Debt Sustainability Analysis'."
Even assuming the original Greek ballot is readable to voters, they still will need to understand the proposal documents. After reading their combined 17 pages, this economist got: (a) a headache, and (b) no clue whether he should vote "yes." The language is too technical in many paragraphs, and it's difficult to get the whole picture of how the agreement will change people's lives. With a bit more time, Greek leaders might have been able to explain the deal – as governments do during regular election campaigns. But on the current timetable, voting "yes" is a leap of faith.
A "no" seems easier to interpret. The president of the Eurogroup strongly suggested on Monday, June 29, that Greeks are choosing between staying or not in the eurozone. In principle, if Greeks voted "no," creditors wouldn't come back with a new bailout offer.
Besides, Greece can't make a July 20 payment to the ECB without financial assistance. The ECB, in turn, can't justify liquidity assistance (the ELA) to an insolvent country. If the ECB cuts off the Greek banking system, Greece is de facto out of the eurozone.
A rejection, therefore, evokes terrible, immediate pain. But I don't think most "no" voters fully grasp the consequences of a Grexit. I know I don't.
In theory, savers would lose most of their money, now re-denominated in new drachmas. Foreign investment would collapse. Unemployment and poverty would rise even higher than they are today. Hyperinflation is possible.
But some studies have shown that dropping the euro would be good for Greece in the long term. A devaluation would help the country become more competitive. In due time, foreign investment would come back, and Greece would regain access to capital markets. Besides, crippling austerity wouldn't be necessary any more.
So the result of the referendum hangs on the interpretations of a difficult question by a poorly informed electorate.
Tsipras and his party have urged Greeks to vote "no," because the terms offered by creditors are too harsh. That in itself is confusing, as Tsipras' latest offer is within spitting distance of the creditors' proposal. If Greeks accept the proposal, Tsipras has said he would step down as prime minister and call fresh general elections.
Two polls conducted by Greek newspapers, before Tsipras called the referendum, found that 60% of voters could accept the bailout conditions. But a more recent survey by Economist Intelligence Unit gave a 60% "no" vote. In addition, a poll conducted on June 28-30, and published in a Greek newspaper, showed 54% of those planning to vote would say "no" to the bailout, whereas 33% would vote "yes." The pool of undecided voters is thus quite deep.
Next: Scenarios post the referendum
