Greeks Reject Bailout Terms In Referendum

Matt Vespa
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Posted: Jul 05, 2015 4:24 PM
Greeks Reject Bailout Terms In Referendum

The referendum on the terms of the new bailout European leaders were offering Greece has been soundly rejected, with nearly 60 percent of Greek voters voting “no” on the deal. Greece’s economy has been in free fall for five years, and voters could not stomach more pension cuts and tax increases on an economy that has yet to find its footing, according to the New York Times:

With more than 70 percent of the vote tallied, the actual count tracked the projections, with 61 percent voting no and 39 percent yes, the Interior Ministry said.

The no votes carried virtually every district in the country, handing a sweeping victory to Prime Minister Alexis Tsipras, a leftist who came to power in January vowing to reject new austerity measures that he called an injustice and economically self-defeating. Late last month he walked away from negotiations in frustration at the creditors’ demands, called the referendum and urged Greeks to vote no as a way to give him more bargaining power.

While Mr. Tsipras now appears to have his wish, his victory in the referendum settled little, since the creditors’ offer is no longer on the table. There remains the possibility that they could walk away, leaving Greece facing default, financial collapse and expulsion from the eurozone and, in the worst case, from the European Union.

At stake, however, may be far more than Greece’s place in Europe, as experts have offered wildly differing opinions about what the referendum could mean for the future of the euro and, indeed, the world’s financial markets.

Even before the voting was over, some European leaders began making efforts to contain the potential damage.

…many [Greek] voters, tired of more than five years of soaring unemployment and a collapsing economy, said they could not accept the terms of the European offer, which imposed yet more pension cuts and tax increases, without any hint of debt relief.

The Times’ cheat sheet detailed the whole debacle, which some have reported could turn into Europe’s Lehman Brothers. In all, it just shows you that socialism hurts.

Here's Bloomberg's explanation of the European Debt Crisis. 

How did Greece get to this point?

Greece became the epicenter of Europe’s debt crisis after Wall Street imploded in 2008. With global financial markets still reeling, Greece announced in October 2009 that it had been understating its deficit figures for years, raising alarms about the soundness of Greek finances.

Suddenly, Greece was shut out from borrowing in the financial markets. By the spring of 2010, it was veering toward bankruptcy, which threatened to set off a new financial crisis.

To avert calamity, the so-called troika — the International Monetary Fund, the European Central Bank and the European Commission — issued the first of two international bailouts for Greece, which would eventually total more than 240 billion euros, or about $264 billion at today’s exchange rates.

The bailouts came with conditions. Lenders imposed harsh austerity terms, requiring deep budget cuts and steep tax increases. They also required Greece to overhaul its economy by streamlining the government, ending tax evasion and making Greece an easier place to do business.

Last Tuesday, Greece failed to honor a 1.5 billion euro debt repayment from the previous bailouts, which technically puts the country in default. The Times also noted that most international banks offloaded their Greek holdings rendering them not vulnerable to whatever happens next, though for those investors who were banking on a Greek comeback probably haven’t slept in a few days. Also, while there is talk of a Greek exodus from the Eurozone, most Greeks still favor sticking with the Euro:

How likely is there to be a ‘Grexit’?

At the height of the debt crisis a few years ago, many experts worried that Greece’s problems would spill over to the rest of the world. If Greece defaulted on its debt and exited the eurozone, they argued, it might create global financial shocks bigger than the collapse of Lehman Brothers did.

Now, however, some people believe that if Greece were to leave the currency union, known as a “Grexit,” it wouldn’t be such a catastrophe. Europe has put up safeguards to limit the so-called financial contagion, in an effort to keep the problems from spreading to other countries. Greece, just a tiny part of the eurozone economy, could regain financial autonomy by leaving, these people contend — and the eurozone would actually be better off without a country that seems to constantly need its neighbors’ support.

Others say that’s too simplistic a view. Despite the frustration of endless negotiations, European political leaders see a united Europe as an imperative. At the same time, they still haven’t fixed some of the biggest shortcomings of the eurozone’s structure by creating a more federal-style system of transferring money as needed among members — the way the United States does among its various states.

Exiting the euro currency union and the European Union would also involve a legal minefield that no country has yet ventured to cross. There are also no provisions for departure, voluntary or forced, from the euro currency union.

Investors may also still be betting that Greece will reach a deal with creditors before or after the referendum, particularly because polls indicate the majority of Greeks favor sticking with the euro.