Why Did Greece Even Have A Referendum At All?

July 8, 2015 1 Comment

There is a rather interesting meme going on in Europe right now…

The Twitter Universe located in Europe has started a hashtag, #ExplainNoToJuncker, where a bunch of anti-Austerity supporters express why the referendum even needed to take place. However, there is just one problem with that: Greece financial situation has not changed, or even improved one iota…

It’s almost as creditors knew this entire circus was pointless, and it was pointless. Considering the fact that referendum happened AFTER €1.6 billion was due to the IMF. So that means Greece has spoken, and creditors will have no choice but the deal, right?

Wrong. The citizens of Greece probably thought they were being bold to reject the terms Troika gave them. The reality is that Greece will have to agree on a new program with their creditors sooner or later, probably with tougher conditions than in the proposal rejected by the referendum. This is because Greece is in much worse shape now than before the weekend.

The default plus the referendum triggered a wave of capital controls that have yet to be lifted. Banks are still scheduled to be closed throughout the week. ATMs are close to being depleted, even with the €60 a day limit in place. Without an increase in Emergency Liquidity Assistance, deposits in the entire nation will run out in a matter of weeks, perhaps less.

This means the economy will go right back into recession, targets for fiscal reforms will grow even more out of reach. This is a problem for Greece because of the €3.5 billion owed to the European Central Bank on July 20th.

There is also a €3.1 billion repayment due a month later. Less than two months away; however, if Greece is going to have a difficult time making the July 20th then making the August 20th deadline would be considered all but impossible.

This means that the only deal Greece can look forward to is an even worse deal than before. While the nation’s leaders have already expressed an interest in staying in the EU, we are talking about possibly defaulting on an ECB loan. Right now, the ECB is holding ELA steady at €89 billion. The moment Greece defaults on the July 20th deadline, we can probably expect that liquidity assistance to be cut to €0.

Or perhaps assistance will be cut the moment Greece decides to leave the Euro. That is ultimately what’s going to happen anyway, and that is what financial institutions believe that is going to happen as well. Soc Gen as increased the probability of a Grexit to 65%, as well as institutional investors such as Bill Gross, who said that there was as much as an 70 – 80% chance of a Grexit.

This is because the situation in Greece is painfully obvious. At some point or another, if they will have to accept the terms EU creditors provide them (whether they like it or not). However, if Greece is still willing to accept the terms (which they have already shown), Grexit will be inevitable. Emergency Liquidity Assistance has always been seen as a temporary solution, as well as an expensive one.

Its not mean’t to be used in perpetuity, and like any other loan, ELA would need to be repaid. Last February, the ECB said that they would not accept Greek bonds as collateral for ELA, meaning that the Bank of Greece would need to provide ELA to troubled banks, set the terms for collateral, as well as assume any counterpart risk if any of the banks were to fail.

To make matters worse, the ECB just tightened the screws on liquidity assistance by increasing haircuts on Greek collateral by 10%, from the original 50%. Haircuts are simply the different between the market value of an asset used to collateralize a loan verse the amount of the actual loan. What this basically means is that if the size of the haircut increases, the amount of funding for ELA decreases, and vice versa. Think of it as a financial asset valued at €30 million having a 60% haircut. This means that amount of the loan would effectively be €18 million.

The financial sector is already under enough stress, which has prompted an outflow of euros out of the country.

Greece is in a very tight spot, and its only going to get tighter as days pass buy without being any closer to a deal. Without being any closer to a deal, Greece is further away from securing the funding they need, which means the probability of leaving the Euro becomes a reality. It almost makes me wonder why there was a referendum in the first place.

Democracy can be a wonderful thing (sometimes), however, it should never be replaced for effective governance and credible policy making. Unless you live in some plutocratic dictatorship, most people believe everyone should have some voice in how their elected officials are governing. However, referendums cannot, and should not, be mistaken for financial/economic policy negotiations.

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