Morningstar's "Perspectives" series features investment insights from third-party contributors. Here, Danae Kyriakopoulou, senior economist at the Centre for Economics and Business Research, outlines the potential next steps following a ‘yes’ or ‘no’ vote.
The International Monetary Fund confirmed last night that Greece failed to transfer €1.55 billion by the end of the day, making it the first developed country to default on the Fund in its 71-year history. While it makes for interesting headlines, the event is not a game-changer in itself. It is something that was broadly expected, coinciding with the expiration of the European part of Greece’s €245 billion bailout and with the lack of a deal preventing an extension that would allow Greece to make a repayment to the IMF.
The important question is what happens next. Much emphasis has been placed on the upcoming referendum that the Greek government is planning to carry out on Sunday, July 5th. Yet it is not clear what the options are in the referendum itself, as well as what are the possible scenarios following a ‘yes’ or ‘no’ outcome.
The first problem is that it is not actually clear what Greeks are voting on. The exact question is whether to accept or reject a proposal presented by the creditors to the Greek government last week. Since then, the creditors have taken this offer off the table, rendering a ‘yes’ vote meaningless. More recently, Greek Prime Minister Tsipras has sent a letter to the creditors with which he tries to slightly alter the proposal in exchange for cancelling the referendum or shifting his support to the ‘yes’ camp, but nothing conclusive has been agreed yet. Eurocrats are still urging the Greek people to vote ‘yes’ irrespective of the particulars of the question, promoting a ‘yes’ answer as a possible basis for further negotiations. A ‘no’ vote on the other hand is portrayed by the Syriza leaders as a message to Greece’s creditors against austerity, and the basis of a better deal. In contrast, opposition parties are pointing to the risk of a ‘no’ vote leading to Grexit. The creditors haven’t thus far taken a clear stance on which of the two outcomes they would pursue in the event of a ‘no’ vote, allowing this ambiguity to govern the political debate.
Cebr sees three possible outcomes in the post-referendum future. Ranked by order of desirability these are as follows: First, Greeks vote no, the creditors give in and present to Greece a more pro-growth proposal. This would raise the chances of Greece staying in the Eurozone (although it won’t guarantee it for the long term), and give Greece a chance for growth within the euro. Second, Greeks vote yes, Greece stays in the euro and returns to the pre-January status quo of promoting the reforms suggested by the creditors. This would probably also entail a change in government. Third, Greeks vote no, the creditors take a hard line, allowing the situation to escalate into a messy, dangerous Grexit. This would be very damaging for Greece in the short run, and would harm the weakest members of its society the most. Microeconomic theory and evidence, as well as common sense, suggest that agents are more likely to take risks when they don’t have much to lose. This has divided Greeks into those prepared to take a gamble and vote ‘no’, a gamble that to an extent resembles that taken with the election of the Syriza party in January, and those preferring the second-best, but safe option of the ‘yes’.
Leaving aside the practicalities and details of what the referendum is about, the public discourse and demonstrations have been boiled down to the simple dilemma surrounding Greece’s position in the monetary union. While it may be wrong to frame the referendum in those terms, having a healthy debate around Greece’s options in and out of the euro is important at this juncture, given how much the risk of Grexit has risen in the past week. Cebr’s view is that the case for Grexit was much stronger in the beginning of the Greek crisis than it is now. The problem now is that Grexit would happen in a very messy way. With the economy already having suffered so much, the short term pain would be disastrous politically, socially, and economically. Of course, staying in the euro is not something that should be pursued at all costs. The creditors' latest "take it or leave it" proposal continued to focus overwhelmingly on the fiscal side with revenue-raising rather than competitiveness-focused measures. It lacked a coherent and credible roadmap to growth. So both Grexit and Euro-continuation are options currently offered to Greece in their worst possible guise. Bearing this in mind, Grexit remains the worse of the two options. The best case scenario would be one where creditors reconsider the costs and benefits of their stance and present a more pro-growth plan that includes some debt relief. Whether it is easier to get there with a 'yes' or 'no' vote on Sunday's referendum is a separate question, and one whose answer depends much more on international diplomacy than on economics.
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