Bruegel’s Senior Fellow Zsolt Darvas on why Greeks should vote Yes in the referendum
This Sunday, Greeks will go to the polls for their first referendum in over 40 years. The ballot asks voters to accept or reject a draft of the terms offered by Greece’s lenders on June 25 to continue lending to the heavily indebted country. The referendum was announced somewhat abruptly last Friday by Prime Minister Alexis Tsipras after he left the negotiations in Brussels without warning a few days before the current bailout program was set to expire on June 30. In a televised address, Tsirpas urged voters to select No and reject the proposal.
Following the referendum announcement, the Greek government made an additional offer to its lenders, however it did not receive consideration pending the referendum. Due to the impasse, Greece missed its payment deadline and went into arrears with one of its lenders, the IMF.
In an effort to avoid a bank run following the European Central Bank’s decision to maintain but not extend the existing Emergency Liquidity Assistance (ELA) program further, the Greek government instituted very strict capital controls and ordered all bank branches closed. During this time, the maximum daily cash withdrawal limit is 60 euros and permission is required transfer money abroad (domestic debit and credit transactions are not impacted).
The government insists a No vote will not cause Greece to exit the euro and that it will strengthen their position to quickly negotiate a better bailout agreement. Can the government’s claims be believed? What do things start to look like for ordinary Greeks if the country starts missing deadlines from other major lenders in the absence of a deal? If Yes prevails, what happens then?
There seems to be a divergence in public opinion on two key issues: on the one hand, Syriza has consistently been polling well post election to the point of not having any meaningful external opposition — all through the negotiations. On the other, we see the Yes options polling neck and neck which they are actively campaigning against. What do you think this says? Did Tsipras overplay his hand?
I think he hugely overplayed. On Friday night they simply walked away from the negotiations, even though the differences between the Greeks and the institutions were very close at that moment. I think [leaving] a few days before the end of the program was not wise.
Calling for a referendum is a good idea exactly because Tsipras doesn’t have a mandate to sign this deal and a referendum can give him that mandate. But then he should have done it a week earlier. He should have done this referendum before the expiry of the previous bailout program. Two days ago he sent a letter saying he is ready to accept almost everything with the exception of a VAT discount for the islands (that he would like to keep) and a few other things. So I think [the way he called the referendum] is a major tactical mistake from his side and the damage has been done.
What are the prospects for a new program now that the old program expired without a renewal on June 30?
I think agreeing on a new program is much more difficult when the previous one is not concluded. The eurozone partners will say “look you had from March 2012 when the second bailout was agreed. You had three years to complete and if three years were not enough and it expired then why would you be more reliable now?”
In the event of a “No”, do you think Tsipras’s June 30 proposal would be accepted?
With a No vote I would be skeptical that any deal can be reached. A number of eurozone ministers and politicians have already said that if the Greek people with a popular vote reject the program — which they believe is essential — it will be hard to agree.
So in the absence of a deal, what becomes a huge challenge for the Greek government?
The crucial issue is that Greece needs a lot of money. In July and August €7 billion is due to the ECB and then a total of €20 billion over the next three or four years. They have a lot to repay to the IMF. So there is a huge funding gap. Even if they were able to maintain a primary surplus, even that would not be enough to service that debt. The [annual] interest cost for Greece is around 2.5% of GDP which means they need a primary surplus at least that high every year just to service the debt.
In the case of a No vote with no agreement, is there any way Greece can get money to pay make these payments?
This money can’t come from the market, it can’t come from Russia or China, the ECB won’t allow more treasury bills, and it can’t come from the IMF.
So the only source is to get more money from Germany and eurozone lenders. I cannot imagine that the German Bundestag will approve €30 billion for Greece if the voters say No. And if there is no new money from Europe, there is the Greek exit. I don’t see any way of Greece staying in the euro area without paying the ECB.
So following a No vote walk through step by step what happens when all the bills come due and the Greek government can’t pay them. What will the road to Grexit look like for people on the ground? In a way, it seems like it’s already begun with the capital controls.
The [euro] exit will start with the cutting back of ELA. The current ELA can last perhaps a few days, maybe a few weeks, nobody really knows. I presume people are taking out the money they need to take out to buy groceries. I would assume tax revenues are down. But the crucial [event] is if the ECB increases the haircut on the collateral that is used.
So Greek banks will either have to post more collateral or they will have to repay the ELA, which they will not be able to. And since there is a single supervisory mechanism in Frankfurt, they will have no choice but to close down the banks the four biggest banks — which would be most [of them]. A country can’t operate without a banking system. People will have super limited access to their savings or their accounts, they won’t be able to conduct transactions like pay utilities. Complete economic chaos. Euros will disappear. Everyone will hide them behind their pillows. The government will probably issue promissory notes like they did in California. They would accept those as a way of paying taxes. It would not be a new currency initially — but it would be a government note. But by then it will be clear to everyone that Greece’s euro membership cannot be saved. I would then expect EU heads of state — all twenty eight of them — to come together and they will amend the EU treaty to allow Greece to exit the euro area. Because that cannot be done without amending the treaty. Ratifying the treaty will take quite some time. They will probably try to do it within a few months. By that time, the British printer who has offered to print the new drachma will have created all the new currency and the army will transfer this huge amount of money to Greece and distribute it. And everything will be extremely messy. It will be a nightmare scenario.
Do you think a “friendly divorce” from the euro is possible for Greece?
No. There is no friendliness any more. Even with a Yes vote we have to wait five years for friendliness to return.
Greece is certainly now feeling the pain. However, both the IMF and Germany have expressed that their balance sheets are strong even in case of a Greek default. Markets have also thus far not blinked. Do you think there is a point at which these measures might be felt by other European countries?
In the near term — the next couple of months or even years I would not expect it major negative impact [for other countries]. For two reasons. One, markets understand that Greece is a very unique situation. It is completely different from Portugal, Italy, Ireland, Spain. Markets can differentiate. The other reason is ECB quantitative easing [which] is a major stabilizing factor. Investors know that the ECB purchases €60 billion per month, most of it composed of government bonds. Markets may experience turbulence for a few months and bond yields may rise however.
I am more worried about the long term. Suppose that Portugal or Italy have a poor performance in two or three years. The German Bundestag would never agree to increase the capacity for a [bailout] program for Italy. Especially after what they went through in Greece. They tried for five years and it was a major failure.
If Yes wins, how easy will it be to remove the capital controls?
Even with a Yes vote I am afraid some form of capital controls will remain in place. Maybe they will raise the cash withdrawal limit, but I would expect them to stay in Greece for quite a while, even in case of a Yes vote.
[They] will be super difficult to remove — even if Yes wins. I am afraid it’s just not that simple. That Tuesday will come and they will let everyone withdraw what they want. First of all, that would require the ECB to provide a huge additional amount of money in the form of this Emergency Liquidity Assistance (ELA). The capital controls can be removed only when trust is returned and there is a perception that the banks will be solvent for the next few years. And that perception will only come from the citizens when they see an agreement has been reached. This requires that money has been disbursed to Greece, the Greek government started to implement the conditionality, and there is a reasonably friendly cooperation between the government and the institutions. Trust can only return when you have all of these very basic conditions. And that will take many months, if not years.
In the event of a “Yes” vote, do you see any way that the current government can hold on in its current form? Varoufakis for example has promised to resign as Finance Minister in the case of a Yes vote.
I think a Yes vote sends a strong signal that the Greek people agree to the program. I think in that case Tsipras has to go.
Do you think a deal can be reached with a Yes vote?
I think a Yes vote gives strong backing from the people to form a new government, and also I think eurozone partners will perceive it very positively. In that case I would see a chance, a significant probability that a deal will be reached.
Support by eurozone partners for a new government is all good and well. However, an eventual Yes outcome would likely still be a close vote, revealing very divided population. The question becomes, what is the makeup of a Greek government that can implement such a deal? Part of the reason Tsipras had to jump in the deep end with these negotiations was because the previous government was unwilling or unable to to extend the old program. Is there any good solution to this problem?
There are no good solutions. Among the bad solutions, I think it is still better to have a new Syriza Prime Minister who supports a deal with the current parliament. I read in the newspapers that Deputy Prime Minister Yannis Dragasakis who is from Syriza is supportive of an agreement. As I read, some European politicians identified him as a person with whom they would be happy to talk. In case of a Yes the best solution is not to call for a new election, because that would take probably a month to organize. It’s not so sure that a new election will really lead to a [drastically] different parliament in any case. Here in Brussels I met a number of members of the European Parliament from Syriza and they seem super European — in a sense that they didn’t seem [at all] “radical”. They have quite clear and reasonable views. They told me that they want to reach a deal. So I think Syriza is very heterogeneous. And if New Democracy and other opposition parties support a deal they can pass the deal with the support of the opposition, even if some Syriza MP’s vote no.
Regardless of a Yes or No vote, it seems like the unsustainability of the debt is never addressed in lender proposals. Why is that and do you see it changing?
It is popular to say that the Greek debt is unsustainable. But I can say plainly that I think this is wrong, but let me explain. Greece has extremely long maturity loans. The interest rates are super low concessional rates. The debt service costs of Greece — the interest payments they pay every year are half what Italy or Portugal or Spain pays. The [percentage] Greece pays is similar to what France pays every year.
So when we talk of debt burden you think the focus should not be on the total but rather the yearly servicing fees?
Yes, it is the servicing that matters. In that sense Greece has a very favorable position.
Sure, but what about the large IMF and ECB principal payments that are due this year especially but also in coming years?
There are two crucial issues: the ECB and the IMF bonds. The ECB currently has €27 billion euros in Greek debt. €7 billion will expire this month and next month, twenty should expire in the next three years. The IMF also needs to be repaid. Altogether this is €50 billion. If they can find that then they have a small debt service fee beyond that.
Couldn’t a haircut or refinancing be done on these IMF and ECB bonds?
For the IMF I have called for this since 2012. Eurozone partners were responsible for the failure of the first  program. Eurozone partners agreed [in 2012] to debt restructuring by reducing interest rates, giving interest rates holidays, deferring interest rates, but the IMF did nothing. So on the IMF side I would very much support giving similar measures or by delaying it and giving a longer grace period.
Would that be sufficient? Is a principal write-down by the IMF and the ECB out of the question though?
The problem is that the IMF articles don’t allow that. I really get upset when Madam Lagarde preaches that the Greek debt is unsustainable and calls on eurozone partners to offer further haircuts and she forgets to mention that the IMF also lent money. The IMF is also responsible for the failure and the IMF should offer this too. The IMF loans won’t be rolled over though, but they should be in my view.
On the ECB the charter has very specific legal limits in the EU treaties about what the ECB can do and what it cannot do. The independence of the ECB and the independence of monetary financing is a such a key and fundamental principle in the EU that if someone proposed to change that law then the Germans would be the first to leave the euro.
Do you think lenders have provided adequate room for growth in the Greek economy?
I am much more optimistic about growth. I wrote a blog post where I showed that Greece could grow for several years if the uncertainty over euro issues would be eliminated. The economy collapsed by 27%, but this was followed by some GDP growth in 2014 and even some job creation. The Greek economy hit bottom in 2014 but now there was a setback in 2015 due to the uncertainty of the past five. So if they can just re-group and remove the uncertainty they can start to grow.
Do you think lenders have provided adequate room for growth in the Greek economy?
I am optimistic about growth. I wrote a blog postwhere I showed that Greece could grow for several years if the uncertainty over euro issues would be eliminated. The economy collapsed by 27%, but this was followed by some GDP growth in 2014 and even some job creation. The Greek economy hit bottom in 2014 but now there was a setback in 2015 due to the uncertainty of the past five. So if they can just re-group and remove the uncertainty they can start to grow.
What is your advice for the Greek people on July 5?
For the Greek people I have very simple advice: vote Yes.
How about for the lenders on July 6?
For the lenders I have a few pieces of advice. For one, reduce the fiscal adjustment requirement. Both in the short term and the medium term. Having a primary surplus of 2.5–3.5% would have an impact on debt trajectory, but whether public debt in 2030 is 140% or 120%, it doesn’t really matter. I think the errors that have been made in the past in calculating future debt were so large that would not matter a lot. If they give a bit of space to the Greek government to breathe, that would also help them a lot. I would also advise them to help on debt sustainability issues. I don’t call for a haircut for the reasons I provided earlier. But they should provide this new loan that Mr. Varoufakis requested to use to repay the ECB and the IMF, and they could also help by extending maturities, reducing the interest rate further and so on.
On the 6th, if there is a Yes vote I would recommend eurozone partners to be much more forthcoming and offer further concessions to Greece which would help the country. First of all it would help the people to believe they matter, they are not secondary citizens in the EU. And I think these measures would not hurt very much. I think this would be in the interest of the lenders, because it would give a much higher chance to repay ten, twenty, thirty years from now. If they are pushed for too much austerity then the same thing will happen a year from now when Syriza will collapse and a new party will form a new government.
So in your view, with a Yes vote the deal is there if the parties want it.
I think so, yes.
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