The Greek Referendum was always going to be a Rorschach inkblot test, with everybody projecting their own perceptions onto the result.
The referendum may be "a triumph for democracy/a cynical political farce", "good/bad for the single currency and the European project" etc (select as required).
The first question in the referendum was largely irrelevant as it was on a plan that had already lapsed.
The second question was certainly the first time, as one Greek observer noted, that a national referendum has been conducted about a spreadsheet (the International Monetary Fund's Debt Sustainability Analysis on the ability of Greece to service its debt under different scenarios)!
The result was less a considered deliberation of the issues than a reaction against European arrogance, illustrated by heavy handed threats by several politicians and functionaries. Only 62.5 percent of the electorate voted.
It is not clear what the No vote signifies. Both the Greek people and their government want to remain within the euro. The Syriza government believes that it gives them a popular mandate to negotiate a new agreement which will provide a new €29bn two-year bailout, which is less onerous and more favourable to Greece. European creditors, who considered the result “regrettable”, claimed that No was a vote for the Hellenic nation to leave the euro.
The reality is little has changed and the troubles of the Greek people are likely to intensify, not abate.
The immediate problem is the reopening the closed banking system, which remains dependent upon funding from the European Central Bank. Without an increase in Emergency Liquidity Assistance (ELA), currently frozen at €89bn, the Greek banks cannot operate and are likely to run out of cash shortly. An additional complication is that Greece must make €3.5bn payment on a bond held by the ECB on 20 July.
The ELA rules are helpfully vague, providing considerable scope for action. But if Greece defaults on its payments, then it would become difficult for the ECB to continue assistance. ECB also has the option of maintaining its current freeze or tightening collateral requirements, which would reduce the funding available to Greek banks. If the entire ELA was called in by the ECB, then the Greek banking system would collapse, triggering losses for depositors as Greece’s deposit insurance scheme is underfunded.
The lengthy negotiations, the banking restrictions and capital controls have crippled the economy. Tourist traffic over the critical summer period may be badly affected, falling by up to 40 percent as holidaymakers switch to Turkey, Spain or Portugal. The Greek economy, which is around 25 per cent smaller than in 2007, may contract further. According to the IMF, Greece may need a further €50-60bn, including around €30-40bn in new financing, simply to make it through to end 2018.
A new agreement appears unlikely to be on more favourable terms than that on offer prior to the referendum. Greek demands for debt relief at the same as they request further funding may not be sympathetically received by many creditors. In any case, the German position remains that there can be no agreement without the IMF - which now cannot participate until its payment arrears are remedied.
The political environment is now poisonous with minimal sympathy for Greece, outside of perhaps France and the European Union. The French government is concerned about the effect of a Greek exit from the euro on the political threat posed by the National Front.
The EU cannot risk the damage to its power and prestige. Countries like Italy and Slovakia have made it clear that they cannot support pension arrangements sought by Greece which are better than that available to their own citizens. Domestic considerations in countries like Germany make it increasingly difficult to support a new agreement and the inevitable provision of further funding.
There are unknowns. For example, Greece might go nuclear forcing its Central Bank to print and circulate more euros unapproved by the ECB, a suggestion made by some Greek politicians. In this unlikely event, the ECB may retaliate by repudiating all euros (around €45bn) printed for the Greek central bank, which are identified by a serial number commencing with a “Y”, causing further chaos.
Whatever the trajectory, nothing is likely to happen quickly. The Greek government has stockpiled oil and food for an expected siege. It might get one as the creditors and the ECB apply relentless pressure.
Devotees of the long standing Greek crisis are advised that purchasing a season ticket may be more cost effective than buying ones to single performances.
Satyajit Das is a former banker and author of Extreme Money and Traders Guns & Money