You are here

Greeks reject austerity, setting up showdown on Euro membership

Monday, July 6, 2015 - 10:49
GREE4354.jpg
Greece voted against yielding to further austerity demanded by creditors, leaving Europe's leaders to determine if the renegade nation can remain in the euro.

[ATHENS] Greece voted against yielding to further austerity demanded by creditors, leaving Europe's leaders to determine if the renegade nation can remain in the euro.

Sixty-one per cent of voters backed Prime Minister Alexis Tsipras's rejection of further spending cuts and tax increases in an unprecedented referendum that's also taken the country to the brink of financial collapse.

As the euro fell to a four-week low in Asian trading and Tsipras's supporters filled Athens's central Syntagma Square waving Greek flags, German Chancellor Angela Merkel and French President Francois Hollande called for an emergency leaders' summit on Tuesday.

The result turns the tables on Dr Merkel and Greece's other creditors, who must now decide if a financial rescue of the region's most-indebted country is still possible. It significantly raises the chances of a Greek exit from the single currency, as the country's banks run out of cash and its economy staggers toward all-out collapse.

"The bill for keeping Greece in the euro area - without commitment to reform - has just risen disproportionately," said Mujtaba Rahman, the head of the Europe practice at political consultancy Eurasia Group.

"The hawks in the euro group will win the debate that aid should be given to the country to leave the currency bloc."

BACK TO TALKS

The euro declined in Asian trading, slipping as much as 1.3 per cent to US$1.0970, the lowest since June 1. The single currency was down 0.6 per cent to US$1.1047 at 10.08am in Hong Kong. Stocks also slid, with the MSCI Asia Pacific Index shedding 1.1 per cent, and Japan's Nikkei 225 index falling 1.4 per cent.

The Greek result reverberated quickly across Europe's political establishment. Within hours of the first projections, Merkel and French President Francois Hollande called for a summit of euro-area leaders on July 7, with banks including JPMorgan Chase & Co saying a Greek departure from the euro was now the most likely scenario.

ECB LIFELINE

The European Central Bank is meeting Monday to discuss extending a new lifeline to Greek lenders, which have been closed for a week under capital controls that were imposed by Mr Tsipras to stem withdrawals.

"Our immediate priority is to restore the Greek banking system," Mr Tsipras, 40, said in a speech after the result emerged. "I'm confident that the ECB fully realises the humanitarian side of the crisis in our country."

Mr Tsipras has said their can be no deal on a new aid plan that doesn't include a restructuring of debt, now almost 180 per cent of gross domestic product.

Finance Minister Yanis Varoufakis has called the EU's approach of excluding talks on up-front debt relief from the aid negotiations as "extend and pretend."

'REALISTIC PROPOSAL'

"Nothing is for free in this world. If Tsipras wants debt relief as he is calling for, he needs to put together a realistic proposal," Wolfango Piccoli, managing director of Teneo Intelligence, said in an interview with Bloomberg Television. "The first move has to come from Athens."

The International Monetary Fund, which, with the EU and ECB, makes up the troika of Greek creditors, also argues that debt relief combined with further financial assistance from Europe is necessary to weather the crisis. Debt relief could be achieved through an extending repayments at low interest rates, IMF Chief Economist Olivier Blanchard wrote in a June 14 blog post.

"The only hope of a deal may rest on the IMF convincing euro-zone governments to include a clause promising debt relief in the future, conditional to Greece meeting certain targets," said Diego Iscaro, senior economist at IHS Global Insight. "This will be extremely difficult, but lenders may come to the conclusion that it is the only way to avoid Greece leaving the euro zone."

WAITING FOR TSIPRAS

European leaders are showing no immediate willingness to compromise. They firstly want to wait for see what proposals Mr Tsipras will offer to keep Greece in the euro, according to a European government official with knowledge of the crisis strategy.

The question is whether they can negotiate with a government that has rejected their conditions for staying in the 19-member currency union, after Portugal and Ireland accepted similar measures and emerged from their own bailout programmes.

Mr Tsipras has "torn down the last bridges across which Europe and Greece could have moved toward a compromise," German Vice Chancellor Sigmar Gabriel said in an interview with the Tagesspiegel newspaper.

RESTORING 'DIGNITY'

Mr Tsipras and his Coalition of the Radical Left, or Syriza, swept to power in January after campaigning to end crippling budget cuts forced upon the country by creditors and promising to restore "dignity." Five months of protracted and antagonistic negotiations followed and optimism for a deal toward the end of June was suddenly damped when he called the referendum, putting an end to talks.

European leaders largely characterised the plebiscite as a vote on membership in the euro itself, although Mr Tsipras insists Greece can stay in regardless and said he would return to the negotiating table.

"The mandate Greeks gave is not a mandate for a rupture with Europe, but a mandate of reinforcing our negotiating power to achieve a sustainable agreement," Mr Tsipras said.

STREET PARTY

Syntagma Square turned into a raucous street party on Sunday night as "no" supporters gathered to celebrate. Some danced to music playing from speaker phones, while others took selfies with the crowds in the background.

Waving the white-and-blue Greek flag, John Govesis, 26, said he and his whole family voted "no." "I like freedom, I don't need money from Europe," he said. "This is the only way forward. I have a job, but maybe tomorrow I don't." The country is buckling under the strain of the capital controls and at risk of undoing four decades of integration with Europe.

The economy has already shrunk about 25 per cent over the past six years while the jobless rate is still the highest in the euro region.

PAYING WAGES

Banks will struggle to re-open without significant new aid from the ECB, importers are concerned about paying their bills, and pension payments are being rationed.

The government may also face difficulty in paying wages of civil servants from next week, Piccoli said, and Greece faces the maturity of 3.5 billion euros in bond payments to the ECB on July 20.

"Although the situation is fluid, at this point Greek exit from the euro appears more likely than not," Malcolm Barr, an economist at JPMorgan Chase & Co. in London, said in a report to clients on Sunday. It could come "under chaotic circumstances," he said.

BLOOMBERG

Read more on the Greek crisis here