On Sunday (05/07/2015) the people of Greece voted ‘No’ to a referendum seeking their support for a debt agreement proposed by their ‘troika’ of creditors that includes the European Union’s (EU’s) executive arm (the European Commission), the European Central Bank (ECB) and the International Monetary Fund (IMF).
Although plebiscites on complex economic/financial decisions are rare, if not unheard of in the modern world, it seems that the Greek government felt that it would be the best way to send a signal to their creditors that both they and the Greek people are of the same opinion when it comes to seeking concessions on austerity measures imposed on the Mediterranean nation by its troika of creditors as part of the 2010 bailout.
Furthermore the Greek government, led by Prime Minister Alexis Tsipras of the left leaning Syriza Party, had indicated that it would resign had a majority ‘Yes’ vote been delivered. What makes the situation even more bizarre is its timing as the referendum was announced only 10 days prior to taking place and took place several days after the most recent debt re-negotiation proposal expired on Tuesday (30/06/2015). This essentially meant that the Greek people were voting on a proposal that was no longer on the table.
This referendum was preceded by an ongoing impasse in negotiations between the Greek government and the EU over a new debt agreement to unlock €7 billion worth of funds. The issue at heart between two lies with the former’s attempt to re-negotiate its existing debt agreement with more favourable terms than the current requirement to restructure the economy by cutting spending and raising more tax revenue as it believes that these measures have been partly responsible for shrinking the economy by close to 25 percent in the last five years.
It is worth noting that the current Greek government were voted in 5 months ago based on their anti- austerity campaign and promise to re-negotiate the debt agreement that was agreed to as part of the 2010 bailout. The 2010 bailout essentially involved the troika purchasing privately held Greek sovereign debt from mainly large multinational financial institutions at a high discount.
The impasse has already started to have an impact on not only Greece and the EU but also the global economy.
First the ECB refused to increase the value of its emergency liquidity assistance program available to Greek banks on Sunday (28/06/2015). This in turn forced the Greek government to impose capital controls of €60 per day on with-drawls and Greek banks to cease operations for at least one week. The ECB has claimed that it had made the decision after allocating close to €89 billion worth of capital from its Emergency Liquidity Assistance (ELA) fund to Greek banks over the past five months. Then Greece became the first ever developed country to default on its International Monetary Fund (IMF) debt after missing a €1.5 billion payment to the lender on Tuesday (30/06/2015).
The financial and economic issues within Greece led to the value of the Euro falling against all major currencies over the past few weeks and increased volatility on financial markets throughout the world as investors scrambled to reduce their exposure to the crisis.
If this impasse continues it could lead to Greece being booted out of both the Eurozone – the 19 country monetary union which uses the Euro as its currency – and the EU – the larger 28 country political union.
This in turn could threaten the existence of the Eurozone or the EU in its current format in the long run as smaller nations facing similar, albeit less pronounced, economic problems may follow suit; especially if Greece manages to improve its economic situation by breaking away and devaluing its currency.
However in order to do that and further restructure its crippled economy it would need to borrow heavily – currently predicted by the IMF to be close to €50 billion over the next 3 years – in the near future just to remain liquid. Given its existing debt woes this will almost certainly be a very difficult task to achieve.