Sunday, July 5, 2015

A Pyrrhic victory

from economist

A landslide victory for rejecting the country's creditors' demands

THE Greek people have spoken. With over 90% of the vote counted, more than 61% of ballots have been cast for "Oxi" (No) in a controversial last-minute referendum that has divided the country into two over the past week. The very confusing 72-word question asked the Greek people whether they accepted a (since-expired) deal proposed by their European creditors. Some have interpreted this as a vote on bail-out terms; others say it is ultimately a vote on Greece’s membership of the euro, and even of the European Union.
Which of those two interpretations ends up being the actual consequence of the result will become clearer in the coming days. Greece’s creditors, including the chairman of the Eurogroup of finance ministers, Jeroen Dijsselbloem, and his counterpart in Germany, Wolfgang Schäuble, have taken a hard line. They have warned Greeks that their position in the single currency club would be at great risk if they voted No, although some reports suggest that Mr Schäuble has softened his stance over the weekend.
What now follows is a standoff between the Greek negotiators and their European creditors. One side must give critical ground if a last-minute deal is to be brokered. All eyes will now turn to a looming series of crucial meetings. Officials at the European Central Bank (ECB) will meet on Monday morning. In the absence of new emergency lending from the ECB, several Greek banks could face insolvency this week. And on Tuesday Eurogroup leaders will meet to decide whether to resume negotiations. They could instead stick to their hard line; some European leaders did their best before the referendum to cast the vote as a choice between continued euro-area membership or "Grexit".
The most pressing question concerns the fate of Greek banks. The ECB's emergency-lending activity has been capped for a full week. With a resounding No vote having come through, nervous Greeks will probably pull as much cash as capital controls allow from their accounts. The banks are expected to run out of cash by the middle of the week, if not sooner, and are in such a fragile state that a collapse cannot be far off. Collapse would probably mean the issuance of a national currency to make depositors whole, and that, in turn, might mean the beginning of the end of Greece's euro membership. That is a worrying prospect. But there may now be too much bad blood coursing across Europe to avoid anything but the ugliest outcomes.

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