Goodbye Greece: No Vote Means Grexit Is Finally Inevitable

JUL 6, 2015 @ 12:01 AM 4,397 VIEWS

Chris Wright ,CONTRIBUTOR

I write about banking and finance in Asia, the Middle East and Africa.

Forbes

Greece has spoken – and it says ‘oki’.

That’s no, to most of us: no to further austerity, no to a previous deal offered by the EU, IMF and other creditors, and no, effectively, to staying in the euro. The rhetoric from Greece – such as Greece’s labour minister Panos Skourletis saying: “The government can go now with a very strong card to continue negotiations [with creditors]” – seems to suggest that the government believes it can stay in the euro and use its referendum as a method to strength its own negotiating position. But the problem is, nobody with any power in Europe seems to share that view. They all think Greece has effectively voted to leave.

Some sample responses: “ With the rejection of the rules of the euro zone… negotiations about a programme worth billions are barely conceivable” – Sigmar Gabriel, deputy German chancellor.

“Rejection of reforms by Greece cannot mean that they will get the money easier.” And: “The nightmare of the euro-architects that a country could leave the club seems like a realistic scenario after Greece voted no today.” – Peter Kazimir, Slovakia’s finance minister.

“Greece has just signed its own suicide note” – Mujitba Rahman, head of European analysis at the Eurasia Group risk consultancy, quoted in the FT.

Still, a Grexit won’t happen tomorrow and there will be further uncertainty, volatility and delay in store. First, Angela Merkel and Francois Hollande will meet this week to discuss what to do, and a key council within the European Central Bank is due to convene on Monday.

Then, all eyes will be on July 20, when Eu3.5 billion is due from Greece to repay a bond held by the ECB.

If Greece can’t pay that, it is likely that the emergency liquidity assistance mechanism will be withdrawn – which has offered a Eu89 billion lifeline. That would flatten the Greek banking sector. With no more euros being provided, Greek’s central bank would have to reintroduce its own currency, presumably the drachma it had before the euro.

Even that doesn’t automatically mean that Greece will be out of the eurozone: it could end up with two currencies for a while. There is no clear mechanism for a country to exit the single currency and progress towards it may be tortuous and last many months.

Also, if Greece leaves the euro, that doesn’t mean it also leaves the EU, or not necessarily. Charles Robertson of Renaissance Capital wrote last week: “We believe it is nonsense to suggest that Greece must leave the EU if it leaves the euro. While lawyers and the ECB argue this is the case, it is politicians that make or change the law, and we believe the EU will not kick Greece while it is down and push it out of the EU.” Robertson, incidentally, also “sees Greece doing better out of Grexit than some commentators,” noting the strength of the country’s services economy and the boon to exports of a devalued currency, though he’s in something of a minority position in this view.

In the meantime, expect world markets to be roiled when they open in the morning – particularly the euro (already heading towards parity with the US dollar), European stock markets, and in particular European bank stocks.

Chris Wright is the author of No More Worlds to Conquer, published by HarperCollins.