International markets bent — but didn’t break — Monday after Greek citizens rejected austerity measures that would have opened the cash-strapped country to billions of dollars in emergency funds.
Stocks in Europe, Asia and the U.S. began the week with a shaky start. But the sky didn’t fall, perhaps in part because Greece’s tenure within the eurozone hasn’t yet come to a decisive conclusion.
More than 60 percent of Greek voters Sunday said “oxi,” which is Greek for “no,” to budget-restricting austerity measures Greece’s creditors have considered prerequisites to unlocking additional aid. The vote represents a resounding victory for Greece’s Syriza party — whose political platform stands in vehement opposition to such restrictions. Things are all going according to plan for Prime Minister Alexis Tsipras. What that plan is, exactly, is still unclear.
“Today, we celebrate the victory of democracy,” Tsipras said in a televised speech Sunday, according to The Associated Press. “We proved even in the most difficult circumstances that democracy won’t be blackmailed.”
Tsipras campaigned last week for voters to reject the austerity measures, calling on citizens “to reject it with all the might of your soul, with the greatest margin possible.”
“Tsipras had urged Greeks to vote ‘no,’ hoping a rejection of the latest proposal would give the indebted nation a [bargaining] chip to continue negotiations with her creditors,” Lindsey Piegza, chief economist at Stifel Fixed Income, wrote in a research note Monday. “At this point, the pressure is on Tsipras to come up with a plan to stay in the euro, but time is running out.”
Analysts throughout Europe and abroad considered a “no” to austerity as synonymous with a “no” to Greece’s overall membership in the eurozone. But Tsipras has been adamant that the public’s rejection of austerity conditions would actually give Greece more power at the negotiating table.
“The mandate you gave me is not the mandate of a rupture with Europe, but a mandate to strengthen our negotiating position to seek a viable solution,” Tsipras said Sunday.
That’s assuming there’s still a negotiating table open for business. Greece defaulted on a $1.7 billion loan repayment to the International Monetary Fund last week after months of back-and-forth, joining Sudan, Zimbabwe and Somalia as countries currently in arrears with the IMF.
Greece faces another deadline on July 20, when it is due to pay the European Central Bank nearly $4 billion. To have any hope of meeting this month’s deadline and ultimately prevent its banking sector from collapsing, Greece will need to work out a deal with creditors sooner rather than later.
“With credit lines to the IMF and the ECB ‘ripped apart,’ the future of Greece is decisively uncertain,” Piegza said Monday. “Greece desperately needs to secure a new deal.”
The Greek public’s rejection of European austerity sent economic waves rippling around the world Monday. U.S. News breaks down what the “no” vote means throughout Europe and beyond.
Greece’s Government:
The “no” vote is undoubtedly a win for the Syriza party. With the vast majority of voters supporting the government’s hard-line approach to negotiations, the defiant antics that have for months frustrated European leaders now seem a bit more justified.
“Voting ‘no’ offers Greeks some prospects for better solutions,” Peter Morici, economist and business professor at the University of Maryland, wrote in an email to U.S. News, noting that “another round of austerity would only further pummel the Greek economy and impose economic deprivation that European leaders should be ashamed to engineer.”
Tsipras has vowed to start negotiating a new deal with Greece’s creditors quickly. An emergency meeting of the eurozone’s leaders has been scheduled for Tuesday, when Greece will have the opportunity to plead its case for bailout assistance again, this time backed by definitive public support.
“The Greek electorate have voted not to comply with the basic philosophy of the euro, or to modernize their economy and make it more competitive,” Bob Baur, chief global economist at Principal Global Investors, wrote in a research note Monday.
Greek Finance Minister Yanis Varoufakis, who has been a thorn in the sides of creditors for his brash and outspoken negotiating tactics, was reportedly told shortly after the referendum vote that he should not attend Tuesday’s meeting. In response, he announced his resignation Monday.
“I was made aware of a certain preference by some Eurogroup participants, and assorted ‘partners,’ for my … ‘absence’ from its meetings; an idea that the Prime Minister judged to be potentially helpful to him in reaching an agreement. For this reason, I am leaving the Ministry of Finance today,” Varoufakis wrote in a blog post Monday, effectively announcing his resignation. “And I shall wear the creditors’ loathing with pride. We of the Left know how to act collectively with no care for the privileges of office. I shall support fully Prime Minister Tsipras, the new Minister of Finance and our government.”
By muting one of the most defiant voices in the anti-austerity camp, Tsipras gives the appearance that he’s willing to play ball with creditors. Whether they’ll step up to the plate is an entirely different story.
Greece’s Creditors:
The ‘no’ vote is a signal to Greece’s creditors that saying “my way or the highway” might not produce the result that’s best for everyone. Greece’s left-wing Syriza party can no longer bear the brunt of the blame for resisting austerity implementations.
“European leaders said a ‘no’ has essentially destroyed any basis for talks, as it shows Greece is unwilling to get her finances — and by extension, her economy — back on track,” Piegza said.
Greece is in default to the IMF and soon risks defaulting on its loans from the European Central Bank, which has pumped cash into the Greek banking sector to bolster the country’s withered cash reserves.
Greek banks were shuttered last week to prevent their complete collapse as nervous Greek citizens withdrew hundreds of millions of dollars in personal savings, and capital restrictions limited how much money Greeks could withdraw from ATMs each day.
“While a ‘no’ vote does not ensure a Grexit (Greek exit from the euro area), without emergency funding, banks may not be able to reopen this week, meaning growing concerns over access to funds,” Piegza said. “With a debt to GDP ratio of near 200 percent, there is no austerity in the world that could bring the country’s debt to GDP ratio back in line with [European Union] standards without sending the Greek economy into deep, deep recession for years.”
Without some kind of bailout or debt restructuring, the ECB is likely to pull the plug on emergency bank funding, in effect forcing Greece to withdraw from the eurozone and reinstate the drachma in order to avoid complete economic collapse.
“We are going to see in the coming days if there are still openings [to reach a deal]. But there are no easy solutions,” Jeroen Dijsselbloem, president of the Eurogroup and Dutch finance minister, said Monday, according to the AP. “If the government and population reject tough measures, then we get to a very difficult place.”
“The core Eurozone countries, and the EU, are unlikely to tolerate membership with an inconsistent fiscal policy to other Euro members,” Baur said Monday. “The creditors do not seem in a hurry to compromise, so the Greek government should be working on some plan to mitigate the inevitable serious economic pain.”
Greece’s People
“The Greek people endured a week of shuttered banks, severely rationed cash and tremendous social pressures before Sunday’s vote. It seems quite likely that their situation will become yet more difficult,” Steven Wieting, global chief investment strategist at Citi Private Bank, wrote in a research note Monday, adding “Greece’s lenders are under no obligation to provide a new offer of assistance.”
Greek banks are unlikely to reopen in the near-term after losing the bulk of their reserves to panicked withdrawals. A Greek departure from the eurozone is becoming increasingly likely, and that’s bad news for the general public.
“For banks to reopen, likely they need a significant confiscation of deposits and a new currency at a substantial devaluation from the euro,” Baur said, noting that a Greek departure from the eurozone is “likely … either in the next few weeks, or in a year or two.”
Even if some kind of deal is negotiated, the cash-strapped country’s problems don’t go away overnight. Greece will still need to pay back its loans and get its economy up to speed, except in the extremely unlikely event the international community just hands Greece billions of dollars in free money.
“The only solution is for Greece to leave the euro area, go back to their domestic currency and inflate the problem away,” Piegza said. “For the Greek people, either way, the result is a decline in the standard of living, but from a political sense, it is much easier to sell inflation than austerity.”
Russia
Russia was also a winner in the anti-austerity vote, though its prize has yet to be determined. Should Greece end up splitting from the eurozone, many expect the country’s next likely suitor to be Russia.
Tsipras and Russian President Vladimir Putin reportedly spoke on the phone Monday to discuss “several questions about the further development of Russian-Greek cooperation,” the Kremlin said in a statement. Putin reportedly “expressed support for the Greek people in overcoming the difficulties facing their country.”
Russia and Greece last month orchestrated a preliminary pipeline deal that will give Russian natural gas a foothold in Europe, much of which is currently sanctioning Russia over its role in the Ukraine crisis.
“Russia needs allies. The popular view was Europe needs Russia for their gas. But Russia needs Europe because the Russian economy and energy are interrelated,” says Mark Luschini, chief investment strategist for wealth management and investment banking firm Janney Montgomery Scott. “They need allies that can buy their stuff, and Greece is desperate for alternatives.”
United States
A Greece-Russia alliance is far from favorable from U.S. perspective. But a Greek departure from the eurozone doesn’t have much direct impact on the U.S. Neither party considers one another major trade partners, and the Greek economy as a whole pales in comparison to U.S. output.
In terms of gross domestic product, Greece (which in 2014 commanded a $237.6 billion economy) is roughly the equivalent of Connecticut (which boasted an estimated $232.6 billion economy). So the U.S. isn’t going to flinch much if there’s chaos in the Greek economy.
“The economies of the eurozone, barring Greece, have strengthened, and importantly for the United States, private financial institutions have substantially reduced their exposure to Greece,” Sen. Heidi Heitkamp, D-N.D., said last month in a hearing before the Senate Committee on Banking, Housing and Urban Affairs. “Policy measures adopted over the past several years have lessened the chance that a Greek default or an exit from the eurozone results in another global financial crisis.”
The bigger concern for the U.S. is dollar valuation. If the euro dips further in the coming months, the comparatively strong U.S. dollar could potentially scare off international trade partners looking for more favorable exchange rates.
The timing of America’s pending interest rate hike has also been called into question, A rate increase around the same time as a Greek departure from the eurozone could shock U.S. markets, so some analysts have speculated persistent uncertainty over Greece’s future could lead Federal Reserve Chair Janet Yellen to further push back an interest rate increase that many speculated would come in September.
“To avoid contagion, the ECB and the Fed are likely to be easing monetary conditions,” Baur said, noting that the world’s financial overseers are likely to avoid jarring economic adjustments that could send markets spiraling. “[A Greek departure] could put the rise in [interest rates] back from September to December, but likely not much more.”
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Greece Rejects Austerity Measures, Faces Uncertain Future originally appeared on usnews.com
