In Greece, a referendum is normally to be held on Sunday 5th . It will determine the future of the Country.
The Greeks will have to pronounce themselves on measures and reforms submitted by the Commission, the IMF and the ECB, in return for an extended financial support.
A ‘yes’ vote would clearly show that Greeks want to stay in the monetary union.
In a case of a “no” vote and if an exit from the Eurozone were nevertheless to happen, the impact on the Greek economy would be drastic but more limited for the Eurozone.
The significant market reaction on Monday 29 June (decline in equity markets, decline in German bond yields, rise in Italian and Spanish yields, etc) shows how much of a feeling of uncertainty has been created by the Greek government’s decision, subsequently approved by the parliament, to call a national referendum on the conditions its creditors want to attach to its bailout funding.
This referendum will be held on Sunday 5 July. According to the Greek cabinet, the referendum question will be as follows: "The Greek people are hereby asked to decide whether they accept a draft agreement document submitted by the European Commission, the European Central Bank and the International Monetary Fund, at the Eurogroup meeting held on June 25.” Those against the proposal of the three institutions should vote Disapproved/No, while those in agreement with the proposal should vote Approved/Yes.
A priori, one could argue that the way the question is formulated creates ambiguity and makes the referendum outcome harder to call. Admittedly, polls have shown on several occasions that a majority of Greeks want to stay in the Eurozone and very recent polls suggest there are more Greeks in favour of a new agreement, and the efforts that come with it, with the country’s creditors than there are against. However, will the polls be right? Will people strictly focus on the referendum question and perhaps manifest reform fatigue or will they focus on the implication of a ‘yes’ or a ‘no’?
It seems safe to assume that by now the Greek population will have a very good understanding of the ramifications of the referendum. First of all, the question on which they are asked to vote has three references to Europe or Euro, a stark reminder that this is about the position of Greece in the Eurozone. Secondly, media (including social media) coverage has been intense about the consequences of a ‘yes’ or a ‘no’. Finally, the introduction of limitations on cash withdrawals and of capital controls gives an indication of how disruptive a further step (leaving the Eurozone) would be. The referendum is about whether the population supports the government’s approach in the negotiations and ultimately about Eurozone membership.
Once the referendum outcome is known, this would not mean that automatically uncertainty would disappear. A ‘yes’ vote would clearly show that Greeks want to stay in the monetary union. A change in government might be needed considering that the Greek government has called on voters to reject the creditors’ proposal. This could make a deal with the current Greek government very difficult. It could also trigger new elections costing more time and leading to more uncertainty although one would expect that funding would be provided pending a new agreement between a new government and the creditors. For Greece, this period of uncertainty, which may last longer than expected, is bad news as it will have significant fallout on the Greek economy rendering economic assumptions made by the country’s creditors outdated.
A ‘no’ vote would increase the uncertainty significantly. It would worsen the strain between the government and Greece’s creditors with the former bolstered by the plebiscite and the latter facing difficulty to pass any deal under their parliament: giving in to Greek government requests would set a precedent for other countries where fiscal adjustment was underway, increasing the risk of moral hazard. The impasse would persist, therefore and Greece would most probably have to introduce IOUs to pay for wages and pensions. The economy would take a body blow. Markets would be looking towards the ECB and what it would decide on the Emergency Liquidity Assistance which it has allowed the Greek central bank to provide to the Greek banking system (in order to address the liquidity squeeze triggered by the deposit outflows). Markets would see as significantly increasing the chances of Greece eventually leaving the euro. If the country would go down that path, it would risk ending up in a legal vacuum. There are no explicit rules on a country leaving the Eurozone nor can it be ‘pushed out’. For European Union membership, admittedly a totally different matter, rules do exist and they stipulate that it’s up to a country to decide whether it wants to leave (so it can’t be forced to leave if it doesn’t want to).
If an exit from the Eurozone were nevertheless to happen, the impact on the Greek economy would be drastic but more limited for the Eurozone. Private-sector exposure to Greece has fallen dramatically since 2012 and the direct exposure via international trade is also limited. However, in the longer run investors might very well become more sensitive to political news and country-specific developments, something which would force the Eurozone to speed up its integration process.
In the coming days, opinion polls should help us to better assess the probability of the two aforementioned scenarios. At the moment, it is clear that Greeks want to remain in the European monetary union. As mentioned above, the imposition of capital controls and limits on withdrawals will probably reinforce this view, we believe. So, on the basis of currently available polls, we would have to say that a Yes vote appears to be the most likely outcome.
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