Exit Stage Left?
Negotiations between Greece, the IMF and organs of the European Union came to a head on Friday. Most people had expected that some kind of 12th hour (it was that late) deal would be struck which would allow the left-wing Tsipras government to save face, but deliver some of the structural reforms that the major creditors had demanded. The discussions were already on borrowed time, but Greece will not formally default until midnight on 30/6/15. That time marks the moment when repayments to the IMF and ECB become overdue and the five month extension until the Greece’s second bailout deal expires.
In the end, the Greek PM announced (Friday) that he would call a referendum of the Greek people to decide if they would accept the creditors’ latest offer or reject it, as he advised. The meeting of Eurozone finance ministers broke up at that stage with its chairman, Jeroen Dijsselbloem, stating that by calling the referendum, Greece had, in effect, unilaterally broken off the talks.
On Saturday, the Eurozone finance ministers (with the exception of Greece) voted unanimously not to extend the current bailout deal beyond its current expiry. This means that Greece will be in default on the 1st of July unless it is offered help from China or Russia. Late on Saturday night, a majority of Greek politicians backed the call for referendum – had it been rejected, a slim possibility that an agreement could emerge still existed.
We are now in uncharted territory. It is almost inconceivable that Greece can continue within the Eurozone if it is in default to the IMF and the ECB. The IMF have made it clear that they will not offer future help if Greece defaults. There is no formal mechanism for leaving the Euro, so it is entirely possible that Greece will be forced out of the EU itself. This will take time, of course.
Tsipras has made his position over the referendum clear: he wants Greeks to refuse to accept the latest offer from the creditors. If the people vote to accept the deal, his position is untenable. However, as Christine Legarde pointed out, the deal and bailout extension offer being decided upon will no longer be available by the date of the plebiscite (5/7/15), so even a “yes” vote would leave the country in limbo. It could trigger fresh elections which could see a new administration come to power better able to accept the demands of structural and spending reform from creditors in exchange for economic life support…