Greece to struggle staying in euro

Uncertainty prevails over Greece’s future as 61.3 percent of Greeks vote ‘no’ in country’s first referendum after 41 years

Photo by: Reuters
Photo by: Reuters

Updated Jul 28, 2015

Although the referendum question did not include anything regarding the euro, Greek voters have made the future of their country in the single currency unpredictable.

Greek Prime Minister Alexis Tsipras said the “no” vote would strengthen Greece’s negotiating position with its international creditors, however, the European Union (EU) shows less willingness to grant more soft loans to Greece this time.

Due to financial, political and geopolitical reasons, the European Union would prefer to keep Greece in the eurozone but many countries, such as Germany, are tired of Athens’ negotiating style. For instance, one day before the referendum, former finance minister Yanis Varoufakis accused creditors of “terrorism.”

Meanwhile, Varoufakis announced his resignation on Monday, saying “his absence” from meetings would potentially be helpful to Tsipras in reaching an agreement.

Upon results, baffled European creditors called a summit for Tuesday to discuss the next step in the Greek debt saga.

Over a phone conversation on Monday, Tsipras and German Chancellor Angela Merkel agreed to present a Greek proposal for an aid deal at Tuesday’s EU summit.

For how long the banks will be shut down is another question in Greece. When Tsipras first announced capital controls on June 28, he assured that restriction will be for a short term, however, with uncertainty overtaking Greece, capital controls look like they are still here to stay.

Greek government announced on Monday to extend the closure of banks beyond Monday by at least a few more days.

Greek banks are losing money fast and cannot function without the aid of the European Central Bank (ECB). The ECB is expected to announce whether to maintain its emergency liquidity fund (ELA) to Greek banks.

In the meantime, different evaluations regarding Greece’s “no” vote majority and its future continued to emerge. According to a United Nations debt expert, Greece can’t take any more austerity as it will cause more social unrest and lessen the chance of an economic recovery.

"I have the impression that the EU had forgotten that international human rights law plays and should play a key role in finance. The international community attaches great importance to the interlinks between human rights and finance," said Juan Pablo Bohoslavsky, the UN independent expert on foreign debt.

Last week, just before Greece defaulted on a €1.6 billion payment to the IMF, a Reuters poll of more than 70 economists placed the median probability of Greece leaving the eurozone at 45 percent. However, since then major international financial institutions revised their forecasts for Greece to remain in the eurozone and now expecting it to leave.

Credit rating agency Standard & Poor’s (S&P) also said on Monday that in light of the “no” vote, it is now more likely that Greece will leave the euro.

Global markets are jittery on Greece’s future, as well, but not much negative reaction has been recorded on the first day after the referendum. According to analysts, there are multiple explanations to the muted reaction of the global markets.

First, the prospect of “Grexit” has now been so widely flagged that its shock impact is gone. Global markets are largely priced to account for it and direct financial fallout from would be small.

Secondly, a good number of asset managers still believe “Grexit” can be avoided. Moreover, many are convinced that the ECB will act swiftly and forcefully to prevent any contagion in the eurozone.

TRTWorld and agencies