Short Fuse Burning

Referendum Fallout Threatens to Ignite Greek Powder Keg

“Our immediate priority is to restore the Greek banking system. I’m confident that the ECB realizes the humanitarian side of

Greeks were out in full force yesterday that saw the passage of the vote against European austerity measures winning by a surprise factor of 61%-39%. However, with the dust now settled and the celebrations dying down, serious headwinds for the country remain that threaten to turn an already combustible situation into a full-fledged humanitarian crisis.

Greeks have grown accustomed to hawkishly watching the calendar over the last few months, having endured a deadline to negotiate additional bailout funding, a default with the International Monetary Fund (IMF), and most recently its referendum date. With the voting now firmly in the rear-view mirror, Greece will be navigating towards potentially its most pressing deadline of all, brought on by liquidity that is all but dried up with its banking system teetering on collapse.

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While 61% of Greeks opposed additional bailout measures, few would be opposed to an emergency liquidity lifeline from the European Central Bank. Indeed, euro notes in Greece’s banks are virtually all but spent, which if unchecked will usher in an insolvency.

The tone was echoed by Prime Minister Alexis Tsipras in a recent speech immediately following the referendum result yesterday, as “Our immediate priority is to restore the Greek banking system. I’m confident that the ECB fully realizes the humanitarian side of the crisis in our country.”

Estimates vary from several hours to a couple days, with the latter being the most likely or optimistic view, of the projected lifespan of Greek banking liquidity. Despite the imposition of capital controls last week and highly reduced pension caps, the banking system simply cannot stay afloat without an extension of a key emergency lifeline – a measure which has yet to arrive in Greece after its divisive vote.

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The majority of Greeks voted for the ‘No’ vote under several pretexts and promises by Mr. Tsipras and Finance Minister Yanis Varoufakisas as well as the Syriza government. Just one day later, Mr. Varoufakisas resigned from his position, under immense pressure from the Eurogroup creditors and the Greek government ahead of a crucial window of negotiations.

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According to a senior official who attends Eurogroup meetings in a recent statement to Bloomberg immediately following the referendum decision, “The first message to Athens is that no one ever wants to see Varoufakis again after he called us terrorists.”

Unfortunately for Greek proponents backing a ‘No’ vote, a number of crucial promises now appear unlikely to be fulfilled or at best hang in the balance. For starters, the likelihood of the Greek government reaching a deal with Eurogroup creditors just 24 hours after its referendum decision is now impossible. Negotiations have yet to even begin between the two sides, with emergency meetings slated to take place amongst senior Eurogroup officials early this week.

Secondly, the Greek government had championed the reopening of banks immediately following its referendum and ‘absolutely’ by Tuesday, per a recent interview from Mr. Varoufakisas with Bloomberg. Regardless, with banks all but sapped of euro notes and the decision of extending a lifeline up for debate, a prolonged bank holiday in Greece will be the reality for the foreseeable future.

Finally and perhaps most importantly, despite Greeks overwhelmingly showing opposition to European austerity measures, roughly 80% reiterated their desire to stay in the Eurozone. However, the passage of a ‘No’ vote has made negotiations that much more difficult between the two sides that have shown little hope of bridging a wide impasse, despite the removal of Mr. Varoufakis.

On the contrary, a Grexit or Greek departure from the euro is now widely seen as the most probable scenario, according to a series of analysts from leading financial institutions such as JPMorgan Chase & Co. This pessimism has been offset in recent weeks by German Chancellor Angela Merkel’s steadfast support of a unified Eurozone, however the advent of the recent vote in Greece threatens to convolute this position with greater political interests at stake.

According to the Barclays Research team, “The Greek public have given Prime Minister Tsipras a resounding win by rejecting the last deal on the table from the country’s major creditors. However, it may prove to be a hollow victory given, in our view, the greater probability of a Grexit. Indeed, we believe that it will be extremely difficult for EA leaders to agree upon a new program with the current Greek government. Further clarity may come from various meetings among EU leaders and the ECB Governing Council today, but markets are likely to remain highly cautious, with risk reduction set to remain an ongoing theme.”

Once Again On the Clock

As it stands now the Greek government has the Eurogroup creditors and the ECB right where it wants them, that is to say, right where they left them at the bargaining table in the first place over one week ago. While Mr. Tsipras’ gamble has appeared to pay off in the interim by garnering national support for his opposition of additional bailout reforms, deep rifts remain in negotiations.

Yesterday the Greek population spoke, voicing their staunch opposition for more years of hardship and structural reforms. Unfortunately, those listening have exhausted virtually all sympathy for the country at this juncture, with serious doubts looming ahead of upcoming negotiations between the two sides.

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