Greece’s full abolition of cash withdrawal restrictions is credit positive for banks

From Moody’s.

On 1 October, Greece (B3 positive) further relaxed capital controls that had been in place since June 2015 following an announcement by the Ministry of Finance in the government gazette. The country’s improving economic prospects and an increase in private-sector deposits in recent months allowed for the easing of capital controls, which will likely strengthen depositors’ confidence and help banks further improve their funding profiles, a credit positive.

The gradual return of deposits to the banking system over the past seven months and greater optimism following Greece’s successful exit from its economic adjustment programme are the key drivers behind the Ministry of Finance and the Bank of Greece’s decision to significantly loosen capital controls. In addition, a material reduction in banks’ dependence on central bank funding through the Bank of Greece’s Emergency Liquidity Assistance (ELA) mechanism signifies banks’ liquidity improvement in recent quarters.

As part of the relaxation of capital controls, the new measures include unlimited cash withdrawal for domestic deposits either through banks’ branches or ATMs; cash withdrawals from a credit and prepaid cards abroad of up to €600 per day and up to €5,000 per month; an increase in the limit on fund transfers abroad by companies to €100,000 per customer per day from €40,000 previously; and the ability for check payments in cash.

The easing of restrictions will likely encourage households and companies to return to local banks any money held outside of Greece’s banking system. An increase in customer deposits in recent years has helped Greek banks reduce their ELA balance, which totalled approximately €4.5 billion, or 2% of total banking assets at the end of August 2018, versus 21% in August 2015.

Also driving the ELA decrease was an increase in interbank lending transactions/repos as international investors’ appetite for Greek risk increased and they accepted a wider range of Greek assets as collateral for such repos. The ELA reduction supports Greek banks’ net interest margins because both the repo transactions and the new deposits carry a lower interest rate than the more expensive ELA, which costs around 1.5%.

Three of six rated Greek banks have fully repaid their ELA balances: National Bank of Greece S.A. , Piraeus Bank S.A. and Pancretan Cooperative Bank Ltd . We also expect Eurobank Ergasias S.A. and Alpha Bank AE to repay their ELA balance over the next few months, while Attica Bank S.A.  will likely take a bit longer to fully eliminate its ELA.

The relaxation measures gradually ease capital controls put in place in June 2015 to stem deposit outflows from Greek banks during the first half of that year (see exhibit). However, the successful implementation of Greece’s economic adjustment programme, which concluded in August this year, and prospects of a gradual return to economic growthare already driving higher private-sector customer deposits, which grew by 4.1%, or €5.2 billion, during the first eight months of 2018.

Following the political and economic turmoil in 2015, tensions have eased over the past two years. The current government has managed to legislate a large number of reform measures, despite its slim majority in parliament and without triggering large-scale protests, as had been the case during the previous two adjustment programs. However, domestic politics and social instability remain the main risks to policy implementation and economic recovery. A potential prolonged political uncertainty, combined with looser capital controls, could cause significant deposit outflows, as was the case in the first half of 2015.

IMF’s Latest On Greece

Ms. Christine Lagarde, Managing Director of the International Monetary Fund (IMF), says Greece debt is unsustainable, further fiscal reforms are needed and confidence in the banking sector needs to be improved.

“The policy package specified in the Memorandum of Understanding (MoU) recently agreed between the Greek authorities and European institutions, with input from Fund staff, is a very important step forward. It not only reverses much of the policy backtracking that caused the previous program to run seriously off track, but puts in place wide-ranging policies to restore fiscal sustainability, financial sector stability, and a return to sustainable growth. I particularly welcome the authorities’ efforts to overcome the serious loss of confidence in recent months through strong upfront actions. Most of these actions have been fully specified in the MoU, and key measures including in the fiscal structural areas will be implemented as prior actions for the disbursement of the first European Stability Mechanism (ESM) tranche.

“In two areas that are of critical importance for Greece’s ability to return to a sustainable fiscal and growth path—the specification of remaining parametric fiscal measures, not least a sizeable package of pension reforms, needed to underpin the program’s still-ambitious medium-term primary surplus target and additional measures to decisively improve confidence in the banking sector—the government needs some more time to develop its program in more detail. This is understandable, and I am encouraged in this regard by the government’s commitment to work with its European partners and the Fund on completing these essential reforms in the coming months. With the detailed specification of these outstanding reforms, the recently agreed MoU will entail a very decisive and credible effort on the part of the Greek authorities to restore robust and sustainable economic growth.

“However, I remain firmly of the view that Greece’s debt has become unsustainable and that Greece cannot restore debt sustainability solely through actions on its own. Thus, it is equally critical for medium and long-term debt sustainability that Greece’s European partners make concrete commitments in the context of the first review of the ESM program to provide significant debt relief, well beyond what has been considered so far.

“In conclusion, I believe that the actions to be taken by the authorities by the time of the first review, in conjunction with the policies specified in the MoU, once they have been supplemented by the above-mentioned fiscal structural and financial sector reforms, as well as by significant debt relief, will provide the basis for a credible and comprehensive program to restore medium-term sustainability. We look forward to working closely with Greece and its European partners in the coming months to put in place all the elements needed for me to recommend to the Fund’s Executive Board to consider further financial support for Greece.”

Greece: a Europe forged in one crisis may have laid the foundations for the next

From The Conversation.

Greece has just experienced a nasty reality check. For Europe, the reckoning might simply lie a little further down the road. The Syriza party and prime minister Alexis Tsipras secured a triumph in the elections of January 2015 based on promises to “tear up” the bailout agreements and put an end to austerity. Until a week ago, when the notorious referendum took place, the party and its leader seemed to stick by their conviction that an aggressive stance towards EU partners should and could broker a better deal for Greece, away from half-hearted compromises. This morning it became obvious that this was not possible.

The Greek government had to sign an agreement not too different from those to which previous governments agreed and which were opposed by Syriza – in fact, some of the measures the Greek parliament is being asked to pass were part of previous agreements but were never implemented. Was Syriza naïve? Were they populists? Probably a combination of the two.

Grexit not dead yet

At least for now, Tsipras seems like a leader who found the courage to assume responsibility and came to realise – the hard way – that the EU is all about compromise. Tsipras has now two choices: either follow the steps of previous Greek governments, equivocate and eventually fail taking the country with him or truly support the plan and try making a positive change out of a very difficult deal. Despite the deal, a Greek exit from the euro is closer than ever, particularly if he chooses the former.

Mobilizing their popularity. Syriza have an edge. George Laoutaris, CC BY-NC-ND
Click to enlarge

Something that could help Tsipras choose the latter is that his government is the first to enjoy very wide political support, at least for the moment. Because of the high stakes and high tension of the last few weeks, all political parties with a clear European orientation have backed Tsipras in the negotiations and seem to support the agreement. This is a weapon that no other government had before in promoting reforms. A Syriza-led government is also the best option for stability in Greece, given the popularity that Syriza and Tsipras enjoy and which should be respected.

But this does not mean that Tsipras would not face opposition or that anti-austerity or populism in Greece has ended. In fact, it is quite the opposite.

Eurosceptics

A sizeable proportion of Syriza MPs, including some of the party’s ministers, have made clear they do not support the agreement. The next few days will show whether this group will take control over the anti-austerity camp. At the same time, others, like members of the government coalition partner Independent Greeks or even far-right party Golden Dawn, remain opposed to the agreement. What happened this weekend would probably only fuel their euroscepticism.

But the way this deal was struck could have implications far beyond Greece. The nature of discussions between eurozone elites uncovered once more the huge distance between what goes on in Brussels and the European citizens. While discussions among the finance ministers of the eurogroup and at the Eurosummit were taking place, social media was filled with frustration over the apparently rather aggressive form of negotiations. International media, meanwhile, were keen to underline the lack of solidarity shown by eurozone countries, especially Germany.

Farage in action at the European Parliament. European Parliament, CC BY-NC-ND
Click to enlarge

European leaders seem oblivious to that and the impact that this whole process could have had on euroscepticism across Europe. The leader of Britain’s anti-EU UK Independence Party, Nigel Farage, was quick to comment that if he was a Greek politician he would vote against this deal, and if he was a Greek who voted No in the referendum he would be protesting in the streets. Just a year after the European elections in 2014, there is a risk of a new wave of euroscepticism which the EU will have to address in the long term.

Crisis management

Jean Monnet, the French political economist, said in 1976:

Europe will be forged in crises, and will be the sum of the solutions adopted for those crises.

Indeed, the EU is the child of World War II and, after that, has evolved through many other crises. One could imagine a similar social media frenzy had the means existed during the failed European constitution of 2005 or even the so-called “empty chair” crisis of the mid-1960s when France withdrew its representatives from the European Commission.

Let’s hope this crisis improves the EU and allows it to progress; however much this latest crisis has been an important one for the public debate, it is by no means the first – and it probably contains the seeds of the next.

Author: George Kyris, Lecturer in International and European Politics at University of Birmingham

Five misconceptions about the Greek debt crisis

From The Conversation.

It is widely accepted that the Greek bailout and austerity package has led to wealth flowing from Greece to its European creditors, benefiting foreign banks at the expense of Greeks, that its debt is unprecedented and unsustainable, that its recession is the unprecedented result of reforms that cannot succeed, and that Greece’s exit from the Eurozone would be calamitous.

Amazingly, none of the statements above are strictly true, leading much of the public discussion of Greece to be unusually detached from the facts.

In this article, I outline my reasons for no longer believing these claims – which I had been led to believe were true when I began to try to understand the Greek debt crisis. This is not meant as a comprehensive guide: I do not presume to make policy recommendations, but do hope that it will help readers better understand some of the issues at stake.

1. The bailouts have extracted resources from Greece

A common belief in discussions of the Greek economy is that the eurozone “has become an extractive project that imposes austerity on poor nations in order to collect debts on behalf of rich ones”. A recent study of capital flows to and from Greece by economists Jeremy Bulow and Kenneth Rogoff debunks this. As the tables below show, capital flows into Greece have not just remained positive, but have increased since the first bailout in 2010. 2014’s flow is slightly negative, partly as the Greek government chose to miss reform targets, preventing release of bailout funds.

Jeremy Bulow, Kenneth Rogoff
Jeremy Bulow, Kenneth Rogoff

2. Bailouts benefit foreign banks more than Greeks

Another misconception is that: “It is not the people of Greece who have benefited from bailout loans … but the European and Greek banks which recklessly lent money to the Greek State.” This was the charge of the Jubilee Debt Campaign, which campaigns for further debt relief for Greece. They report that €252 billion has been lent to Greece by the “Troika” (the EU, the European Central Bank and the IMF) since 2010, which they claim has been used as follows:

  • €35 billion in “sweeteners” to get the private sector to accept the 2012 debt restructuring
  • €48 billion to bail out Greek banks following the restructuring
  • €149 billion on paying the original debts and interest.

These add up to €232 billion, causing Jubilee to conclude that “less than 10% of the money has reached the people of Greece”.

This conclusion incorrectly assumes that none of the recipients of the €232 billion are “people of Greece”. But if the “sweeteners” were for the Greek private sector, they benefited Greeks; bailing out Greek banks directly helps Greeks who have bank deposits, who hold shares in banks (whether directly or via their pensions), and who work for banks.

The best data that I’ve seen suggests that Greek banks may have held just under half the Greek government debt before the 2012 restructuring – twice as much as any other country. Thus, payments to creditors also reached Greeks. Finally, even payments to foreign creditors benefit Greeks by removing obligations from Greeks to pay.

Perhaps the most amazing estimate to come from Bulow and Rogoff’s study is that Greek citizens have “withdrawn over a hundred billion euros from the banking system” since 2010: where has that money gone?

3. A debt-to-GDP ratio of 180% is unsustainable

Japanese prime minister, Shinzo Abe, has said he will work with the G7 and other Asian countries to ensure economic and financial market stability as the eurozone grapples with Greece’s debt crisis. This news is unremarkable and unsurprising: the third-largest economy in the world is standing by to help. Unreported is that Japan has the world’s highest debt-to-GDP ratio, at about 240% – much higher than Greece’s.

Furthermore, Japan does not seem to have any easy measures for quickly reducing this: unemployment is already low, leaving little slack in the labour market. And, as one of the world’s least corrupt countries, its unofficial sector is small, leaving little hope that actual GDP is much higher than official GDP. Japan faces serious economic challenges (including two decades almost without growth), but no one sees it as other than stable.

By contrast, there are many ways that Greece could quickly reduce its debt-to-GDP ratio: its unofficial economy is estimated at 25% of its official economy; while some officially unemployed Greeks may be working unofficially, many are not – so labour market reforms could spur rapid growth.

There’s an open debate on how to interpret debt-to-GDP ratios and higher numbers are certainly worrying. Yet, Japan suggests there is no magic number: how a country can manage its debt depends on the circumstances and choices of that country.

4. Greece’s transition recession is unusually long

The graph below shows real GDP as a percentage of 1989 GDP in post-Soviet transition economies. Produced by economists Nauro Campos and Abrizio Coricelli, it shows that going through a political and economic transition simultaneously, without a coherent reform strategy, can be disastrous for economic growth. After the collapse of the Soviet Union, post-Soviet countries suffered decreases in official output for years, in spite of international support, including help from the European Bank for Reconstruction and Development. Twelve years after 1989, only six of the 25 countries had official GDP figures above their 1989 levels.

GDP in post-Soviet states in the decade after the collapse of the Soviet Union. Nauro Campos and Abrizio Coricelli

Greece’s political transitions between democratically elected governments have been less fundamental than the post-Soviet transitions, but its commitment to reform has been questionable throughout. Its poor performance in privatisating inefficient state-owned enterprises has drawn particular attention: the following graph shows privatisation not only well behind schedule, but falling further behind all the time. This deprives the Greek state of revenues, and the Greek people of more efficient services.

IMF

Greece finally seemed to have turned back up in 2014: having fallen by about 20% since its peak in 2008, real GDP grew, officially ending the recession; the government balanced its books before debt payments, and had earned a primary surplus in 2013; unemployment fell; the government was able to borrow on the regular markets, rather than via support packages.

Thus, one of the tragedies of the present situation is that protracted negotiations over the country’s bailout conditions may have just increased the overall cost of the transition process.

5. Greece is too big to fail

The idea that Greece is too big to fail and will have significant knock-on effects for global financial markets has been used in some of the brinkmanship at play in the country’s debt negotiations – including by former finance minister Yanis Varoufakis.

But, while the Greek debt crisis has increased uncertainty and any further default or uncontrolled exit from the euro will pose costs, the markets do not seem terribly roiled by the prospect of its default. This is not surprising: Greece makes up about 2% of Europe’s population and GDP; Europe’s economy is stronger than it was in 2010-2012.

An underappreciated aspect of the “too big to fail” idea is what it does to an economy’s prospects. Indeed, one of the leading explanations of Soviet economic decline is the “soft budget constraint”. Soviet firms tended to be much larger than their Western counterparts, giving each considerable power to renegotiate its production plans – without more resources, it could threaten to harm other sectors in the economy, which had few alternative suppliers to turn to.

This seems to be the concern expressed by many of the other European countries: at the eurozone’s inception, the open question was whether the Bundesbank’s credible, low-inflation, low-interest rate standard would prevail. Or whether the eurozone would end up converging on one of the less credible, high-inflation and high-interest rate standards. If the moving appeals of a country comprising 2% of Europe can successfully soften Europe’s budget constraint, then it can be expected that any larger country will be able to as well, if they can demonstrate a severe enough crisis.

Were Greece to become the first country to leave the eurozone, it would give us invaluable real experience in a fairly controlled context; this would improve eurozone policy when faced with similar situations in the future.

Author: Colin Rowat, Senior Lecturer in Economics at University of Birmingham

Greece: Sliding from Periphery to Exit

According to FitchRating, Greece’s predicament gives new meaning to the phrase “peripheral eurozone”. Eventual exit is now the probable outcome.

Critical deadlines in the Greek crisis have frequently come and gone without progress or consequence, but the referendum was a defining moment in determining the country’s economic position in Europe.

The resounding “no” vote provides a substantial boost to the position of the Syriza-led government in its negotiations with creditors. The Greek authorities clearly consider the referendum result to provide a sufficiently strong public mandate to insist on less austerity and a meaningful reduction of the government’s debt burden. From the Greek perspective, if creditors want to ensure the country’s continued membership of the eurozone to avoid a serious – perhaps irrecoverable – setback to broader European integration, they must recognise there are limits to the terms Greece can accept.

Has Greece Miscalculated?

Greece’s strong argument in favour of greater accommodation on the part of creditors faces several hurdles that are likely to prove collectively insurmountable. Most obviously, debt relief would be politically difficult for a number of eurozone governments. Countries that have gone through their own painful economic adjustments in recent years will be loath to write down credit extended to a country seen – rightly or wrongly – as not willing to do the same. The prospect is equally unappealing in countries that have largely avoided the crisis but have provided big financial contributions to the various Greek support packages.

Even if public opinion could be swayed, creditors may take the view that there is still the need for significant policy change in Greece, and that debt relief would simply address the consequences of previous shortcomings, not the root causes. Greece still needs to undertake major reforms to deliver sustainable public finances and more robust economic growth, and creditors may be reluctant to surrender the ongoing conditionality provided by support programmes that could be discontinued if there were wholesale debt forgiveness. The risk would be that Greek imbalances re-emerge, eventually threatening the viability of the eurozone again.

The state of Greece’s banks seriously undermines the government’s negotiating position. Capital controls, bank closures and the cap on European Central Bank (ECB) liquidity mean the economy is steadily being asphyxiated, the consequences of which will be faced primarily by the government rather than its creditors. This adds considerable urgency to the need for the Greek authorities to reach an agreement that would ease the pressure on withdrawals and allow the ECB to reconsider the cap. In the absence of an agreement, it becomes increasingly likely that the government will need to introduce a secondary means of payment, commonly referred to as scrip. An officially sanctioned parallel currency could only be interpreted as an important step towards exit from the eurozone.

A final point, which may only become clear once the history is written, is that the referendum might have tipped the balance of how other eurozone countries weigh the risks of Greece’s continued membership in the common currency area versus its exit. Greece may come to be viewed as a small and uniquely recalcitrant eurozone member that either can be effectively ring-fenced, or cannot be sufficiently altered to fit the eurozone mould, – or both. It could therefore spend some time on the outer edges of the eurozone periphery before membership becomes untenable.

Greece: Sliding from Periphery to Exit

According to FitchRatings, Greece’s predicament gives new meaning to the phrase “peripheral eurozone”. Eventual exit is now the probable outcome.

Critical deadlines in the Greek crisis have frequently come and gone without progress or consequence, but the referendum was a defining moment in determining the country’s economic position in Europe.

The resounding “no” vote provides a substantial boost to the position of the Syriza-led government in its negotiations with creditors. The Greek authorities clearly consider the referendum result to provide a sufficiently strong public mandate to insist on less austerity and a meaningful reduction of the government’s debt burden. From the Greek perspective, if creditors want to ensure the country’s continued membership of the eurozone to avoid a serious – perhaps irrecoverable – setback to broader European integration, they must recognise there are limits to the terms Greece can accept.

Has Greece Miscalculated?

Greece’s strong argument in favour of greater accommodation on the part of creditors faces several hurdles that are likely to prove collectively insurmountable. Most obviously, debt relief would be politically difficult for a number of eurozone governments. Countries that have gone through their own painful economic adjustments in recent years will be loath to write down credit extended to a country seen – rightly or wrongly – as not willing to do the same. The prospect is equally unappealing in countries that have largely avoided the crisis but have provided big financial contributions to the various Greek support packages.

Even if public opinion could be swayed, creditors may take the view that there is still the need for significant policy change in Greece, and that debt relief would simply address the consequences of previous shortcomings, not the root causes. Greece still needs to undertake major reforms to deliver sustainable public finances and more robust economic growth, and creditors may be reluctant to surrender the ongoing conditionality provided by support programmes that could be discontinued if there were wholesale debt forgiveness. The risk would be that Greek imbalances re-emerge, eventually threatening the viability of the eurozone again.

The state of Greece’s banks seriously undermines the government’s negotiating position. Capital controls, bank closures and the cap on European Central Bank (ECB) liquidity mean the economy is steadily being asphyxiated, the consequences of which will be faced primarily by the government rather than its creditors. This adds considerable urgency to the need for the Greek authorities to reach an agreement that would ease the pressure on withdrawals and allow the ECB to reconsider the cap. In the absence of an agreement, it becomes increasingly likely that the government will need to introduce a secondary means of payment, commonly referred to as scrip. An officially sanctioned parallel currency could only be interpreted as an important step towards exit from the eurozone.

A final point, which may only become clear once the history is written, is that the referendum might have tipped the balance of how other eurozone countries weigh the risks of Greece’s continued membership in the common currency area versus its exit. Greece may come to be viewed as a small and uniquely recalcitrant eurozone member that either can be effectively ring-fenced, or cannot be sufficiently altered to fit the eurozone mould, – or both. It could therefore spend some time on the outer edges of the eurozone periphery before membership becomes untenable.

Greece votes No: experts respond

From The Conversation:

The Greek people have voted, saying a resounding No to the terms of the bailout deal offered by their international creditors. What will this mean for Greece, the euro and the future of the EU? Our experts explain what happens next.

Costas Milas, Professor of Finance, University of Liverpool

Greek voters have confirmed their support for their prime minister, Alexis Tsipras, who now has the extremely challenging task of renegotiating a “better” deal for his country.

Nevertheless, time is very short. Greece’s economic situation is critical. On July 2, Greek banks reportedly had only €500m in cash reserves. This buffer is not even 0.5% of the €120 billion deposits that Greek citizens have to their names. It is only capital controls preventing Greek banks from collapsing under the strain of withdrawal.

Basic mathematical calculations reveal how desperate the situation is. There are roughly 9.9m registered Greek voters. Assume that – irrespective of whether they voted Yes or No – some 2.8m voters (that is, a very modest 28.2% of the total number of registered voters) decide to withdraw their daily limit of €60 from cash machines on Monday morning. Following this pattern, banks will run out of cash in three days and therefore collapse (note: 3 x 2.8m x 60 ≈ 500m).

There is therefore very little time for the Greek government to strike the deal with their creditors that will instantaneously give the ECB the “green light” to inject additional Emergency Liquidity Assistance (ELA) to Greek banks to support their cash buffer and save them from collapse. In other words, Greece does not have the luxury of playing “hard ball” with its creditors. An agreement has to be imminent.

Financial markets, expected to start very nervously on Monday morning, will probably stay relatively calm as the reality of the economic situation spelled out above is more likely than not to lead to some sort of agreement (provided, of course, that Greece’s creditors will listen to Tsipras). Whether this agreement is good for the Greeks, this is an entirely different story.

Richard Holden, Professor of economics, UNSW Australia

By calling this referendum and shutting off negotiations for nearly a week, the Syriza party has brought the Greek banking system very close to insolvency. Greece can’t print euros so Greek banks will soon need to issue IOUs, or the demand for money will not be met, leading to utter chaos. Who will accept these? How will they be valued? These are big, scary questions to which nobody knows the answer.

By voting No, Greece has tied the hands of European Central Bank president Mario Draghi. As a matter of politics there’s not much he can do in the short-term and with Greek banks insolvent he may not be able to do anything simply as a matter of law.

At least one if not all the major Greek banks are likely to fail early this week. When this happens, the Greek economy will essentially come to a halt. Nobody knows what will happen, but it surely won’t be good.

The other depressing consequence of the No vote is that Greek finance minister Yanis Varoufakis’s promise to resign if his fellow citizens voted Yes will not come about. It has been abundantly clear that Syriza representatives have been miles out of their depth from the time they took office.

Everyone with real knowledge and experience of financial markets and liquidity crises told them to stop playing chicken with the IMF and ECB. They should start listening immediately.

George Kyris, Lecturer in International and European Politics, University of Birmingham

A historic referendum for Greece and Europe tells a very interesting story. While results indicate that a sizeable 61% rejected existing policies towards the Greek crisis, polls have consistently shown that the majority of Greeks want to remain in the eurozone. This exposes the success of Syriza based on its populism, which has allowed Greeks to think that they can stay a credible member of the EU, while at the same time taking unilateral decisions and refusing to recognise the obligations of their eurozone membership.

This not only creates unrealistic expectations but it is also a very sad result for the relationship between the EU and its citizens, which, once again, falls victim to national governments’ short-term strategies. In this climate of unrealistic expectations, the Greek government embarks on a mission impossible to secure a better deal for the country, where economic, political and social peace has been seriously undermined in the past few months and week especially.

The first reactions of Greece’s EU partners to the No vote are far from positive.

In his address after the referendum, Alexis Tsipras indicated the formation of an ad hoc national council with the participation of major political parties to prepare the negotiation strategy. The next few days will show if a more united Greek front is possible and capable of improving things for the crisis-hit country.

Ross Buckley, Professor, Faculty of Law at UNSW Australia

The Greek people have decisively voted No to more austerity imposed from Frankfurt. This is unsurprising. Voters rarely vote for higher taxes and lower pensions. However other polls reveal clearly that the Greek people overwhelmingly also want to retain the Euro. So this is one giant gamble. The Greeks are betting that the potential damage to other countries, especially Spain and Italy, and thus to the very fabric of the Euro, is simply too great for the Eurozone to eject Greece.

When voting on Sunday most Greeks probably felt they were reclaiming control of their own economy. However, paradoxically, the No vote has done the opposite. Greece’s short to medium term economic future is now in the hands of others, particularly Germany and France.

Greek banks today are all but out of Euros. Normally in this situation a nation’s central bank simply prints more currency. Greece can’t do that, as no one country controls production of the Euro. So the options over the next month or so seem to be that either Germany, France and the European Central Bank blink, and extend more credit to Greece, or Greece’s financial system will cease functioning and ultimately it will be forced to print drachma.

Remy Davison, Jean Monnet Chair in Politics and Economics at Monash University

With eyes wide shut, Prime Minister Alexis Tsipras has sent his country to the wall.

The “OXI” voters in Athens last night were in full party mode. But in the cold, harsh light of day, the depressingly-painful hangover begins.

61% of voters will wish they didn’t drink so much of the OXI Kool-Aid. Especially when the realisation hits voters that they can only get €60 out of the ATM. Or €50, as €20 notes are now scarce.

The next hurdle for Athens is ominous. The government has a $3.5 billion repayment due to the ECB in mid-July. Defaulting on the 30 June IMF payment was not as serious as the media made out; the IMF default process is slow and ponderous. Conversely, the ECB controls Greece’s capital lifelines. Its emergency lending assistance (ELA) facility has kept Greek banks liquid up to this point. However, the ECB’s Governing Council and the Eurogroup ministers are unlikely to be sympathetic if Tsipras and Varoufakis attempt to renege on the ECB debt repayments.

A deal will ultimately be struck or Greek banks will not reopen without assistance from the ECB. Europe’s central bank will not refinance Greek banks endlessly, as the absence of capital controls before they were imposed on 29 June saw billions of euro offshored within days.

Tax evasion remains a systemic problem for Greece. A Swiss media source has reported that Athens is quietly offering amnesty from prosecution to Greek tax evaders, who have squirrelled away their euro in Swiss bank accounts, if they pay 21% tax.

A Grexit is still extremely unlikely. If there is one thing that government and opposition parties agree upon, it is that there will be no attempt to depart the eurozone. It is not in Greece’s interest, and there is no legal mechanism with which to do so.

An extra-legal attempt (i.e., outside the EU treaties) by a qualified or absolute majority of EU member governments to vote for Greece’s ejection from the eurozone would result in a Greek application to the European Court of Justice for an injunction. A hearing by the ECJ on an attempt to remove Greece from the eurozone could potentially take two years or more, given the complete absence of precedent and the considerable time and resources required to compile briefs for a case of such complexity. Financial commentators who believe in a high probability of a Grexit are either deluded, or have little comprehension of how the institutional mechanisms and procedures of the EU actually work.

The tragedy is that Tsipras and Varoufakis did not need initiate this crisis, as Greece and the IMF were only $400 million apart in their negotiations before the Greek government walked out. Tspiras and Varoufakis have spun the recent IMF report, which calls for debt restructuring, as somehow supporting their side of the story.

In reality, the IMF has been heavily critical of the Tsipras-Varoufakis government and its unwillingness to undertake the requisite, difficult structural reforms that Greece needs, including further privatisation, industry deregulation and competition policy reform, rigorous taxation restructuring in the Greek merchant shipping industry, and tackling offshore tax evasion. Why a far-left government in Greece wants to help rich Greeks to avoid tax defies logic.

In June, a reasonable compromise may have been reached between Athens and the Eurogroup. But it’s unlikely Euro Area ministers will have much sympathy to spare in the next round of negotiations.

Greeks may have voted with an overwhelming “OXI”, but it’s unlikely they realised they might also be voting for capital controls, insolvent banks and a financial system on the verge of meltdown.

Nikos Papastergiadis, School of Culture and Communication, University of Melbourne

A profound recognition has been given now, not just by economists, but by the people of Greece, that the economic policies pushed by the troika are counter-productive.

The government can now walk into negotiations in a strengthened position. They can honour their promises. They have no intention to leave the eurozone, let alone the EU, but can focus on a debt restructure, tackling tax evasion and modernising the state.

I expect some sort of financial resolution in the next 24-48 hours, because a move back to the drachma would be catastrophic.

When politicians in Europe say things like ‘It’s not a problem for us there is no risk of economic contagion,’ that is a profoundly immoral comment given there’s a real risk Europeans will die this winter as a result of their policies. Their sense of solidarity with the union is profoundly blinkered. The risk is not just economic contagion, it’s political contagion. They don’t want Syriza to be the example for other European governments. They wanted Greece to be humbled and crippled by these austerity measures. This divide and conquer attitude means there will be long-term political consequences.

I am so proud of the courage demonstrated by Greeks who have stood up in the face of their own oligarchs, who launched a smear campaign against the government, and said ‘enough is enough’.

James Arvanitakis, Professor in Cultural and Social Analysis at University of Western Sydney

The Greek people have shown overwhelming support for the Greek government and their stance against the so-called troika.

While most commentators may claim they suspected the outcome, I think those who are honest would say the decision was too close to call. The 61% vote in favour of the government does not indicate this, but the reality is the vast majority of Greeks did not know themselves what their vote would be.

In the end, the existential crisis of potentially leaving the Euro and even the European Union was usurped by the fact that they have had enough: enough of austerity that has driven the economy into the ground, enough of 25% unemployment and a lost generation of productivity with 50% youth unemployment, and enough of the troika and the bankers holding them to ransom. As one academic said to me when I was recently there:

“Who created the crisis and who pays for it? Like the GFC, it was those that lent the money, those that fudged the figures and those who have moved their money into offshore accounts. We lose our houses, they sip Retsina and watch sunsets on the islands.”

So what is next for the Greek people?

The obvious answer is uncertainty. But the uncertainty and potential for financial meltdown seems to have usurped the absolute hopelessness that is associated with ‘more of the same’.

Over the last five years we have seen the Greek government meet most of the austerity requests put forward by the troika. Economic theory tells us that in the “long run”, the austerity would work. For the Greek population however, the long run is too far away, unrealistic and a party trick they are no longer willing to fall for.

Greeks have said enough. They have decided it is better to reboot the economy and suffer the potential consequences than continue to see deeply flawed measures bring nothing but financial misery.

Over the next few days we will see continued celebrations. These will quickly disappear depending on the outcome of the negotiations. As I have written elsewhere, Greek society is fraying, how the negotiations go including a potential “Grexit” would determine just how far this unravelling goes.

The heartbreaking image of an elderly man, 77-year-old retiree Giorgos Chatzifotiadis, collapsed on the ground openly crying in despair outside a Greek bank, captured the attention of the world. It is a manifestation of what happens when economic policy and ideology is separated from the impacts on real people.

The “No” vote will restore the pride that has evaporated. But whether this pride turns into something productive or something that is a chauvinistic nationalism, no-one knows.

Many Challenges If Resolution Needed On Greek Banks – Fitch

The four largest Greek banks have failed and would also have defaulted had capital controls not been imposed at the outset of the week, due to deposit withdrawals and the ECB’s decision not to raise the Bank of Greece’s (BG) Emergency Liquidity Assistance (ELA) ceiling, says Fitch Ratings.

The Greek banking system’s liquidity and solvency positions are very weak and some banks may be nearing a point where resolution becomes a real possibility. The ECB is responsible for supervising and authorising the four major Greek banks, and the BG is resolution authority for the others.

Resolution of Greek banks, if required, is unlikely to be straightforward. We believe it would be politically unacceptable to impose losses on Greek creditors and that efforts would be made to find a solution which avoids this but still complies with EU legislation. Existing bank resolution laws in Greece are relatively mature, sharing many similarities with the EU’s Bank Recovery and Resolution Directive, although they exclude explicit bail-in of senior unsecured creditors.

In April, Panellinia Bank was liquidated under this framework, with selected assets and liabilities sold to Piraeus Bank. Panellinia’s small size may have facilitated speedy resolution. Potential resolution of any more systemically important banks would be far more complex.

Recapitalisation of Greek banks using domestic resources would be impossible due to the sovereign’s weak financial condition. The remaining EUR10.9bn European Financial Stability Facility notes available to cover potential bank recapitalisation or resolution in Greece were cancelled by the European Stability Mechanism (ESM) when Greece’s bailout programme expired on 30 June.

The Greek deposit insurance fund, which could be used to recapitalise banks contained only around EUR3bn at end-2013. No pan-EU deposit insurance fund yet exists but under the recast Deposit Guarantee Schemes Directive, EU banks can access other countries’ deposit insurance funds. Other EU member states would be highly unlikely to agree to share due to a lack of confidence in Greece and its banking system.

The ESM could still inject funds directly into the banks, but a precondition would be the bail-in of 8% of liabilities and own funds. This would most likely wipe out much or all equity in a failed bank. The equity/assets ratios of the four largest Greek banks were 8%-10% at end-1Q15, but losses incurred since are likely to have reduced this figure. Greek banks have issued limited debt, so ESM rules would theoretically make uninsured deposits vulnerable to bail-in if a bank were to suffer material erosion of own funds before any resolution action.

But any bail-in of uninsured deposits would be politically unacceptable for a Greek government and would also be unlikely to be palatable for Greece’s international creditors, as they overwhelmingly relate to “real economy” SMEs and retail customers. An alternative, more creative, solution would therefore probably be needed to resolve and/or recapitalise Greek banks. This would depend on political goodwill and the outcome of negotiations with creditors, which are still highly uncertain.

The liquidity position of Greek banks is much deteriorated without access to incremental ELA. The ECB only extends ELA to solvent banks and against acceptable collateral. The credit quality of Greek banks’ domestic loan books is exceptionally weak. We calculate that for the country’s four largest banks an aggregated total regulatory capital erosion equivalent to around 4.8% of risk-weighted assets (5% of domestic gross loans) would probably render them non-compliant with the EU minimum total capital requirement of 8%, assuming static risk-weighted assets.

At end-March, these banks reported 90-days-past-due loans equivalent to around 36% of total domestic loans, and arrears may since have risen significantly.

A swift lifting of capital controls is highly unlikely even if there is successful resumption of negotiations with the ECB, IMF and European Commission. Controls on Cypriot banks, lifted in May, lasted two years.

How a ‘Grexit’ Could Strengthen the Eurozone

Interesting perspective on the Greece situation from Knowledge@Wharton.

The debt crisis in Greece is quickly turning into a Greek tragedy. Banks have closed for a time, ATMs have cash limits and the stock market has not opened. Greece’s bailout expires on June 30, the same day its $1.8 billion debt payment is due to the International Monetary Fund. Greece reportedly will not pay it. Prime Minister Alex Tsipras has called for a July 5 referendum on the latest bailout terms by the IMF, the European Central Bank and the European Commission.

While the situation is dire for the Greeks, Wharton finance professor Jeremy Siegel says the crisis will likely be contained because of freer lending to banks in other countries. And if Greece does exit the European Union, he believes it will strengthen the eurozone. Siegel points to the euro gaining ground even as news of Greek bank closings led to expected declines in the European capital markets — which were to a lesser extent reflected in the U.S. markets as a result of a flight to quality.

As for the impact of the crisis on the Fed’s intention to raise the federal funds rate later this year, Siegel says the U.S. central bank will take the situation in Greece into account if it continues to be a problem months from now. But he does not believe the debt crisis will present enough anxiety for the Fed to derail an increase in the overnight bank lending rate. Siegel expects the rate hike to come in September.

IMF Confirms Greece is in Arrears and Seeking an Extension

Mr. Gerry Rice, Director of Communications at the International Monetary Fund (IMF), made the following statement June 30th regarding Greece’s financial obligations to the IMF due today:

“I confirm that the SDR 1.2 billion repayment (about EUR 1.5 billion) due by Greece to the IMF today has not been received. We have informed our Executive Board that Greece is now in arrears and can only receive IMF financing once the arrears are cleared.

“I can also confirm that the IMF received a request today from the Greek authorities for an extension of Greece’s repayment obligation that fell due today, which will go to the IMF’s Executive Board in due course.”