The euro, a symbol of European integration, is facing the greatest crisis since its launch in 1999. In a referendum held on July 5, a majority of Greeks voted against the austerity demanded by the European Union. The result was 61% against and 39% for, a far larger “no” vote than anticipated. This outcome signifies the Greek people’s dissatisfaction with the harsh austerity measures they have endured for more than five years.
While the future is uncertain, Greece will find it more difficult to receive financial support from the EU. Moreover, by revolting against creditors, the prospect of Greece leaving the eurozone—often referred to as Grexit—has assumed greater reality.
Greece is where Western civilization began and where the current form of democracy was born. This history contributed to Greece’s early accession in 1981 as the tenth nation to join the European Economic Community, the predecessor to the EU.
The Greek economy deteriorated rapidly as the global recession deepened in 2008 and has experienced a serious debt crisis since 2010. This crisis was occasioned by Greek government efforts to keep its debt exposure from coming to light. As the economy faltered, the unemployment rate rose to the 20% level. Unemployment is far worse for young people, among whom it is approaching 50%. The EU has sought to arrest this crisis by forcing austerity measures on Greece. These efforts, however, have backfired in the form of the referendum results.
EU Blackmail and Greek Dignity
Prime Minister Alexis Tsipras, from the leftist Syriza party, has criticized EU austerity measures as “blackmail” and as policies that “sully the dignity” of Greek citizens. In his victory speech delivered late at night on July 5, Tsipras called the referendum results a victory for democracy and justice and a mandate that will strengthen his hand in further negotiations with the EU.
The EU support program, however, expired on June 30. Greece has failed to repay a debt of €1.5 billion that was due to the International Monetary Fund on that date and is now in arrears. The EU does not appear eager to restart support negotiations: a German government spokesperson has frostily stated that there is “no basis” for further discussions with Greece.
The EU and IMF agreed to a financial support program totaling €230 billion in 2010 and 2012. Despite some twists and turns, one year ago government finances were improving, structural reforms were progressing, and economic growth was turning positive in Greece.
In a general election in January 2015, Tsipras and the Syriza party assumed political power on a wave of support from a majority of Greek citizens exhausted with austerity. Since then, relations with the EU have soured and negotiations have broken down regarding austerity measures, which were the condition for the release of the remaining €7.2 billion in the support program; this program expired on June 30.
A range of criticism has been directed at the way the referendum was conducted. Problems that have been raised include the lack of sufficient time for debate—there were only eight days from the announcement of the referendum to the day of the vote—and the difficulty of understanding the question placed before the Greek people.
Turmoil Returns to International Markets
The referendum’s vote against austerity greatly roiled international financial markets on Monday, July 6. The Nikkei 225 average on the Tokyo Stock Exchange momentarily fell by more than 500 points against the prior week’s close and was down 427.67 at Monday’s close. The yen appreciated against the euro in the Tokyo foreign exchange market. In Europe’s major stock markets, share indexes fell between 1% and 3% against the prior week’s close.
In the sovereign bond market, the yield on 10-year Greek bonds rose to 17.3%, an increase of nearly a fifth from a yield of 14.8% at the end of the previous week. It will not be surprising if the referendum’s outcome has a circuitous impact on the trend for global interest rates.
Whether Greece will exit the eurozone will for the time being depend on the actions of the European Central Bank. The ECB has provided €89 billion as emergency liquidity assistance through the Bank of Greece to support the cash positions of Greek banks. Now that the austerity measures demanded by the EU have been rejected, the ECB is expected to freeze the additional supply of liquidity.
The likelihood is high that some Greek banks will soon run out of money without fresh injections. If banks that are responsible for the circulation of money in the economy run out of euros, the entire Greek economy will be depleted of the currency, bringing an exit from the eurozone that much closer.
An Approaching Nightmare Scenario?
The Greek government is about to meet a succession of debt service dates without a safety net of financial support from the EU and IMF. On July 10, sovereign notes worth €2 billion will reach maturity, and on July 13 the Greek government will need to make a debt payment of €450 million to the IMF.
The next big date that is approaching is July 20. On this date, Greek bonds worth €3.5 billion held by the ECB will reach maturity. If this redemption is not fulfilled, there is the potential that the ECB will end its liquidity support of Greece. In such case, Greek banks will risk running out of euros. In relation to Japan, yen-denominated bonds (samurai bonds) issued by Greece worth €83 million will reach maturity on July 14.
In the referendum, Greeks opposed austerity measures that would reduce pensions or increase the value-added tax, but they did not appear to think that leaving the eurozone is inevitable. Reports from Athens indicate that many citizens worry that a return to the drachma, Greece’s currency before joining the euro, would mean the collapse of the economy. In a telephone survey released on July 5, fully 87% of respondents were in favor of and 9% opposed to remaining in the eurozone.
A note published by the British multinational bank Barclays on July 5 asserted that agreeing on a financial support program with Greece would be extremely difficult for the EU. It projected that Greece would run out of liquidity and be forced to issue its own currency, concluding that Grexit is the most likely scenario.
Slovak Finance Minister Peter Kazimir has warned that refusing reforms should not make money more easily available and has stated that Grexit has become a realistic scenario.
Will it be possible to restart support negotiations with the EU and IMF and to reach an early agreement? Or will Greece’s cash position worsen further, causing Greece to default in succession on its debts and leading to a nightmare scenario where the country abandons the euro and is forced to issue its own currency?
(Originally written in Japanese by Murakami Naohisa of Nippon.com and published on July 7, 2015. Banner photo: Hoisting an “Οχι” (No) flag at an anti-austerity demonstration at Syntagma Square in Athens on July 3, 2015. © Jiji.)