Greece Analysis: When No doesn't mean No (and Yes doesn't mean Yes)

Sunday's referendum is a political stunt. How Greek and European leaders react to it will be equally consequential to Europe's future.

By NIV ELIS
Updated: JULY 6, 2015 00:15
How will the Greek economy affect Israel?
Only two options faced Greeks in Sunday’s national referendum: a simple “Yes” or “No.”
The 72-word question they needed to answer was somewhat more convoluted, asking people whether they agreed to a complex economic bailout plan that was on offer from a variety of European institutions on June 25.
As of press time, the polls seemed to indicate a victory for “No,” the answer Greek Prime Minister Alexis Tsipras championed. But no matter how the Greeks voted, the referendum was just the latest negotiating stunt in a prolonged confrontation with European creditors. Its greatest power will be in its effects on negotiations.
Indeed, the debate surrounding the referendum was couched in misleading rhetoric from all sides.
Greece’s ruling Syriza party wanted its citizens to believe that a “Yes” vote would lead to more economic pain and more austerity.
They were not wrong.
Even the International Monetary Fund has acknowledged the toll that overzealous austerity measures have taken on Greece’s economy, which has shrunk more than 25 percent since the global financial crisis began. A 2013 IMF report said the negative economic effects of austerity measures were several times larger than anticipated, and another report two weeks ago concluded that even if Greece takes on all the reforms creditors demand, it would need some debt relief to make its debt burden sustainable.
Debt relief is one of Tsipras’s central demands.
But what would a “Yes” vote really have meant? European leaders have made clear that since Greece defaulted on a €1.6 billion loan to the IMF last week, the offer was no longer available anyway. The financial panic that ensued since Tsipras called the referendum has made the country’s economic situation even more precarious than it had been just weeks earlier.
Greece has had to impose capital controls, limiting euro withdrawals from ATMs to €60 a day and pension collection to €120 a week. Banks and the stock market closed. The same IMF report that said Greece needed debt relief also pointed out that the Greek economy was recovering nicely before Syriza’s election win and that the country would not have needed further assistance if Tsipras hadn’t slowed the reforms. Now it will need another €35 billion to €50b.
just to get back to where it was.
A “Yes” vote, in theory, should have meant that Greece will swallow Europe’s bitter pill and finally pull back from the euro-breaking brink, but the political ramifications would have thrown that option into doubt.
Tsipras’s finance minister, Yanis Varoufakis, had indicated he would step down in the event of a “Yes” vote. Tsipras also could very well resign, leading to government chaos, a new coalition or possibly elections.
All that would make it very difficult to approve a plan by July 20, which is when Greece’s next big payment is due. That payment, to the European Central Bank, is far more significant than the missed IMF payment because defaulting on it would very likely cause the ECB to cut off its emergency assistance to Greek banks (if they survive that long). Such a move could level Greece’s financial system, and force the government to print IOUs or even an alternative currency, effectively pushing it out of the Eurozone and endangering its EU membership as well.
In other words, even if the Greek people accepted Europe’s package in the referendum, there was no guarantee their government would make good on their wishes.
So what of the seeming “No” vote? European leaders wanted Greeks to believe that the vote was about Greece’s continued participation in their shared currency. That was true, but only to a degree.
Even if the “No” vote is confirmed, it will be up to European leaders to decide whether they can muster more flexibility in negotiating with a newly emboldened Tsipras government, or whether they are fed up.
“They can stay in the euro with a ‘No,’” said Eran Peleg, chief investment officer of Clarity Capital. “The other Europeans all still want Greece to remain in the Eurozone and not leave. That means that whatever happens today [Sunday], although the chances of a Grexit [Greek exit] have increased, we still believe that the likelihood of them leaving the Eurozone is fairly low.”
Four out of five Greeks want to stay with the euro, and Europe’s leaders have been clear that it is their preference to avoid a Grexit. Seeing Greece slip over the precipice would put pressure on other weak European countries such as Spain, Portugal and Italy, increase European borrowing costs across the board, and weaken the currency. On the other hand, if Europe allows Greece’s shenanigans to lead to better bailout terms, it’s a sure bet that those same weak countries will be emboldened to ask for the same.
So while the “No” vote does push Greece closer to a Grexit, it by no means cinches the deal.
Then, of course, there’s the possibility that the vote will be so close that it won’t matter at all. The referendum, after all, is a political stunt, and will not have binding results. Politicians could dismiss an unfavorable result if it comes within a very slim margin of victory.
Israel should not be worried about the direct implications of Greece’s economic drop-off.
In a cabinet meeting Sunday, National Economic Council Chairman Eugene Kandel said: “It is anticipated – in all scenarios – that the direct impact of the Greek economic crisis on Israel will be low. This is because of the Israel financial system’s low exposure to Greece and because Greece is not one of Israel’s major export targets; exports to Greece amounted to approximately $450 million in 2014, approximately 1 percent of total exports.”
Indeed, a potentially larger problem is brewing in China, where the overheated stock market has been on a frightening downward spiral.
As Bloomberg noted, the “dizzying three-week plunge in Chinese equities has wiped out $2.36 trillion in market value – equivalent to about 10 times Greece’s gross domestic product last year.” That could affect Israel and its economy much more directly than Greece’s potential financial collapse.
The ripple effects a Grexit could have on Europe and the euro, however, should keep Israelis up at night – Europe is Israel’s largest regional trading partner and its economic fate has direct implications for Israel’s exporters.
Sunday’s vote will not be the final word on Grexit. As The Economist noted, Grexit is a process, not an event. A “Yes” vote would have made a quick deal easier, and the “No” vote made Grexit more likely, but either way the vote was just one more domino falling along a path that will split numerous times before it reaches its end.
“I don’t envy the Greeks at this point,” said Peleg. “In any case, it’s not going to be any easier in the short term.”