Will Greece Make It to the Referendum?
The announcement by Prime Minister Alexis Tsipras that Greece would hold a July 5 referendum on its financial rescue has analysts rushing to predict the outcome of an inherently uncertain ballot. The events of the eight days leading to the vote will be equally interesting, and every bit as consequential for Greece and Europe.
Cornered by the country's creditors and confronted by a lose-lose situation, Tsipras announced early Saturday that he would hold a referendum to allow citizens to decide whether to accept the conditions that Europe and the International Monetary Fund are demanding to assist Greece. That seems a simple question to pose to voters. Yet beneath the conditionality formulation, Greeks will face a rather paralyzing choice: either to opt for continued austerity with an uncertain outcome, or to refuse further tightening and see their country default and have to impose capital controls.
Even if they choose the former -- accepting the creditors' conditions -- it isn't certain that Greece's European partners will reciprocate with the type of huge upfront debt reduction and emergency financing that is needed for the country to have a real shot at restoring growth and financial viability. On the other hand, it isn't absolutely clear that a "No" vote would lead to Greece's exit from the euro zone (I think it would). And if Greece were to leave the single currency, it isn't clear what type of institutional relationship it would be able to maintain with Europe.
With so much at stake, the next eight days promise to be full of fraught deliberations, mixed with misinformation and scare tactics by all sides. And the debate won't be contained to Greece. Expect a region-wide European discussion, as many leaders will be forced to consider how much they want to explicitly participate in efforts to influence the outcome.
For all these reasons, the outcome of the July 5 referendum will remain uncertain until the very last minute. This prospect, as well as some big events on the calendar, will challenge the Greek government's ability to navigate the run-up to the poll without risking a major financial accident.
When Greece's banks open Monday, they are likely to face renewed requests for deposit withdrawals, adding to liquidity and solvency strains. (On Saturday, there already were reports of long lines at cash machines.) Banks would only be able to meet the outflows if the European Central Bank agreed to additional funding via Emergency Liquidity Assistance. Such an agreement is far from a given in light of the additional credit risk that would be borne by the European system of central banks.
Meanwhile, the government will be struggling to handle the large payment due to the IMF on Tuesday. To avoid a default that would have serious and wide-ranging implications, Greece would need to secure either some type of grace period or new bridge financing.
These are not the only looming issues for the Greek government. It also needs to maintain its political base within the Syriza party, whose supporters and allies are increasingly questioning its ability to keep electoral promises. Without this base, Tsipras would need to form a new coalition or call for national elections. And either step would make policy implementation more difficult, whatever the outcome of the referendum.
Until now, no European leader -- German, Greek or from a regional institution such as the European Commission or the ECB -- has wished to go down in the history books as the person responsible for the first exit from the euro zone. This responsibility has now been shifted to the Greek electorate. Not only is their verdict highly uncertain, but there are also genuine questions as to whether Greece's situation won't have radically evolved by the time the vote is scheduled to take place, forcing a different reality.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
To contact the author on this story:
Mohamed A. El-Erian at email@example.com
To contact the editor on this story:
Max Berley at firstname.lastname@example.org