7th July 2015
Invesco’s John Greenwood looks at what the future holds for Greece and how the rest of the eurozone will react to the outcome of the referendum...
On 5 July the Greek people had to choose in a referendum between Scylla and Charybdis: voting “Yes” if they were willing to accept the demands of their creditors and “No” if they rejected those proposals.
The outcome was that 61.3% voted “No” and 38.7% voted “Yes” in a turnout of 62.5% (6.16 million people out of 9.86 million registered voters).
The Greek Finance Minister, Yanis Varoufakis, had promised that he would resign if the Yes vote won. With the victory of the No vote he has nevertheless resigned.
Given that his presence and confrontational attitude had exacerbated relations between Greece and its creditors, his resignation serves to facilitate the start of renewed negotiations between Syriza and the leadership of the hated troika.
However, even if talks resume within a short period, there is no assurance of a long term, sustainable compromise being reached between the two seemingly irreconcilable positions. The problem is that both sides are living with convenient fictions that they dare not acknowledge.
On the Greek side the facts are that the government had borrowed over €356 billion by 2011, or 171% of GDP. After a bail-out in 2012 the public debt was reduced to €305 billion, or 157% of GDP.
However, since then, public debt has risen and the nominal GDP has declined further. Today Greek government debt is estimated at €320 billion or 180% of GDP in 2015.
This is predominantly held by the EU, the ECB and the IMF (the “troika”).
While the exposure of private creditors to Greek banks and companies has been drastically reduced from €206 billion in 2012 to €21 billion in April 2015, government indebtedness has increased, and is not sustainable at current levels.
In face of this insurmountable debt load, the Greek government has been reluctant to adopt the recommended reforms and austerity programmes advocated by the country’s creditors.
The reality is, then, that the Greek state is insolvent, and needs further large-scale debt relief following the bail-out of 2012. But even then, the economic reforms and improvements in governance have been so minimal that few investors would count on Greece being able to grow sustainably in the future – at least within the eurozone.
As yet the Greek government does not dare propose the return to an independent Greek national currency, or drachma.
On the creditors’ side, there is an almost universal refusal to acknowledge that the troika’s loans to Greece are essentially in default.
Throughout the existence of the eurozone, the mantra of the leadership in Brussels, Frankfurt or Berlin has been that budgetary and debt rules will be followed, defaults will not occur, and that the monetary union is “irreversible”.
Allowing serial disobedience of the rules, acknowledging bail-outs and defaults, or taking write-offs from sovereign entities within the eurozone would inevitably undermine the solidity of the monetary union, threatening further defections.
Therefore the policy has been to extend more loans and pretend that any lapses are temporary and will soon be corrected – a sovereign-level version of “extend and pretend”.
In the wake of the referendum results, we will probably see an enormous effort by both sides over the next few weeks to negotiate an agreement that is more lenient to the Greek people, but somehow maintains the fiction that the Greek government’s debt is still in good standing.
The aim will be to ensure that the troika has not allowed the principle of “no defaults and no bail-outs” to be violated.
Yet markets are beginning to perceive that the facts are starting to undermine these convenient fictions.