Why the Greek Referendum Points To a Certain Default and ‘Grexit’

The drawn out affair between Greece and its creditors took on a whole new twist over the weekend. You may have heard by now that Greece has opted for the ‘nuclear’ option. On early Saturday morning, Prime Minister Alexis Tsipras announced a 5 July referendum on the bailout agreement.

The referendum will ask the Greek people to choose between more painful spending cuts and defaulting on their loans. In a country with 26% unemployment, you can bet on the latter taking place.

As expected, this raised the likelihood that Greece will default on its 1.5 billion euro loan to the IMF. With that particular repayment due on 30 June, it’s hard to see anything but a Greek default at this point.

But perhaps this was the plan all along.

By announcing the referendum, Tsipras was making a calculated play. Following his announcement, he proceeded to plead with creditors to grant a small extension to the IMF loan.

Predictably, creditors flatly rejected that idea. They want to see Greece’s maintain its commitment to spending cuts and debt repayments. Put another way: more pensions and wage cuts, less popular uprisings.

So Tsipras knew exactly what he was doing.

He would have known that creditors would never submit to an extension. After all, it’s in their interests that the Greek people have no say on the bailout agreement. Given the choice, the average Greek would vote to free themselves from the tyranny of their creditors.

Tsipras knew that a referendum would only antagonise the troika of the IMF, ECB and EU. So he chose to put the pressure back on them.

By asking for an extension, which they dismissed, the creditors come across looking like heartless crooks. Not that the Greek people needed more evidence that the creditors are extortionists. But it only serves to heighten tensions ahead of the referendum on Sunday.

The Greek government acts to prevent a run on the banks

With the referendum date set for 5 July, the fears over a default are at an all-time high. The ECB’s insistence that no bailout extension would be granted was all that was necessary for panic to set in.

The result of all this political wrangling is that Greek banks are going into lockdown mode.

The Bank of Greece first suggested installing capital controls to stem a run on banks. Long lines at ATM’s have become a common sight since the referendum increased the chance of a default. Already Greeks have withdrawn up to 1.3 billion euros of savings since Friday.

Greek finance minister, Yanis Varoufakis, didn’t hide his disappointment about capital controls:

Capital controls within a monetary union are a contradiction in terms. The Greek government opposes the very concept’.

But he couldn’t have been too disappointed. Not long after, the government followed through on the BoG’s recommendations, imposing capital controls. As a result, Greek banks are set to remain closed on Monday.

So what pushed the government to fix capital controls?

Not surprisingly, it was the European Central Bank’s refusal to support Greek banks. And with the number of deposit withdrawals rising, banks were given little choice. One has to wonder though why any Greek still held their money in banks…

On top of this, Reuters reported that the Greek stock market would also remain closed on Monday. Of course, this is an admission that the market would take a hammering. With the loan default a certainty at this point, you can imagine the amount of selling that would have taken place on the markets.

So for now, both banks and the stock market are set to remain closed on Monday. But there are reports that banking capital controls will extend all week leading up to Sunday’s referendum. Unless, by some miracle, Greece manages to avoid a default tomorrow, that’s a strong likelihood.

All of this means that only thing standing between Greece and a default is the Greek people themselves. For the troika of creditors, that’s the worst possible outcome.

The referendum will put the issue of Greece’s continuing debt obligations in the hands of those it’s affected the most — the Greek people. Their decision to reject the bailout will cause havoc on global markets once a Grexit becomes unavoidable. Make no mistake, the referendum will produce a vote of no confidence in the bailouts. With already deteriorating living standards, few Greeks will vote for further wage and pensions cuts.

That will allow the Greek people to reclaim some semblance of self-determination. It’ll be a painful road back to prosperity, but it will never happen as long as Greece remains an obedient lapdog to their creditors.

Mat Spasic,

Contributor, Markets and Money

PS: The situation in Australia is nowhere near as bad as it is in Greece. But our economy has its own set of problems. As one of Australia’s leading investment analysts, Greg has been warning for months that we’re sleepwalking into a recession.

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