Dubai: The Greek government had its moment of glory on Sunday when it secured a resounding ‘No’ vote in referendum but it faces a total collapse of the economy if doesn’t secure a deal with its creditors.
The Europeans hated the idea of the referendum. They like the result even less. But both parties need a deal to save Greece and the euro, according to analysts and economists.
The Greek government is preparing to present fresh proposals to secure desperately needed financial aid. These ‘new’ proposals are likely to be based on a plan it submitted last week, when it called for a €29bn two-year loan from the Eurozone’s permanent bailout fund. Making the talks easier Greece has appointed a new finance minister Euclid Tsakalotos, an Oxford-educated economics professor who is more acceptable for European governments than his predecessor.
Finding a solution that keeps Greece in the monetary union would require the acceptance by the Europeans that more fiscal efforts have to be matched — not “preceded” -- by explicit debt relief — the big point of contention between Greece and its creditors.
“The public opinion in core Europe, already tempted by throwing Greece out of the monetary union, the ‘big no’ may be seen as the last straw. Offering concessions now would be seen as weakness, handing Greece a victory that may resonate throughout the periphery,” said Gilles Moec, Europe Economist at Bank of America Merrill Lynch.
Hopes of an immediate breakthrough are not high according to many analysts. They say the paradox is that Greece will now have to agree on a new program with the creditors, with tougher conditions than in the proposal that the referendum has just rejected. This is because the Greek economy is now in much worse shape following this week’s events, and particularly the closure of banks and the introduction of capital controls. The economy will go back into recession, the fiscal targets will be even more out of reach, and banks are likely to need more capital. Moreover, everything needs to be finalised in the next two weeks. Greece needs more loans to repay €3.5bn to the ECB on July 20. And Greek banks need an increase in the emergency liquidity assistance (ELA), as they could run out of cash as early as this week.
“The two sides will need to finalise a deal on a new program this week, and the Greek and European parliaments will need to approve it next week. Otherwise, a Greek economy starved for cash and a default to the ECB will increase substantially Grexit risks,” said Moec.
Analysts at Standard and Poor’s believe the referendum result raised the chances Greece would leave the Eurozone. While the odds of a disorderly Greek exit may have risen, some analysts believe there are good enough reasons on both sides to seek a compromise formula.
“European political leaders’ creativity, patience and stamina should not be underestimated. That said, the latest turn in the Greek saga may indeed trigger another escalation before a deal can be struck. So the heat and noise may persist before the European Central Bank’s money becomes due on 20 July,” said Christian Gattiker, Chief Strategist and Head Research, Julius Baer.
