Referendum Conundrums

The referendum is back. Last time this happened in the Greek saga then-PM Papandreou from the Socialist government was put under immediate hard pressure from the side of the creditors, particular from Germany, and not only had to retreat its proposal but also from government. Nobody in Berlin, Brussels or Washington was amused to hear that the referendum is back, this time not only as a proposal but as a political fact. The date set is July 5, and in order to allow this as a orderly referendum it needs (i) an extension of the current program that ends on June 30th and (ii) a passing in the Greek parliament. Then the question still is how a rather complex offer from the creditors will be put in a simple referendum question. We will learn more about all those details, and be sure that they are not technical in nature but deeply political.

I guess that the creditor camp was surprised by this move of the Greek government, even though it has been mentioned before. The take it or leave it situation is gone by now, at least until July 5. Will the creditors be willing to keep up their last offer until then? Or will they do what they indicated and remove the offer today? Given that Greece is doing what a democracy is supposed to do with such a vital question, namely go back to voters and ask for their opinion, it will be difficult for the creditor camp to denounce this step. But then again, this happened before and there is no guarantee that it will not happen again.

What’s next then? Greece will not make its IMF payment on Tuesday. This failure will not lead to a default as practices and rules of the IMF do allow for such a postponement. Credit rating agencies already indicated that missing payments to public creditors do not start a credit event. The problem will be the ECB where ELA payments may be stopped – something Jens Weidmann is demanding with strong words since some time, and with even harsher words in the last couple of days. If this would happen, Greek banks would falter and a bank run would occur. Capital controls would be put in place, and all this can happen already over the weekend.

The referendum can end in two ways. (1) The last offer of the creditor camp will be accepted. In this case, the current government would have to enact what it despises. Given the factional divisions of Syriza, this would require cross-party votes, and thus quickly lead to a new elections. In economic terms, austerity in Greece would get another push. (2) The offer would be rejected. In this case, Greece would default on its debts and move to a new currency or a parallel currency, plus introduce capital controls. A parallel currency in the form of IOUs would allow Greece to stay for the moment in the Eurozone; this money would be used to pay for public salaries, pensions, and also the refinancing of the banking system. The Euro stays as legal tender. Of course, this can only be a preliminary solution as the new currency will have problems to get a sustainable reputation. All this anyway would be no solution for dealing with Euro-denominated debts, and chances are that Greece would default along the lines. Taking into consideration that Greece is relatively import-dependent and relatively export-weak, it can be assumed that inflation pressures build. This would further reduce real purchasing power of already relatively low wages, and thus add to the growth weakness.

My reading of the two bad options is that the faction around Tsirpas prefers austerity within the Eurozone but can express this only after they got a political mandate. The referendum proposal may exactly deliver this, and also offer the opportunity to go back to elections in order to get a renewed mandate. Tricky politics.