Greece: A First Glance at the Day After

Published on July 2, 2015

As Greece goes into the weekend with the yes or no campaigns in full swing for Sunday’s momentous Referendum vote, the headline that really caught our attention was Finance Minister Yanis Varoufakis’s threat to resign if the country votes “Yes” on Sunday: it is very hard to imagine a “threat” that would galvanize and cheer the YES camp more than that.

All joking (sort of) aside, however, the Varoufakis threat underscores a point we made more than a month ago (SGH 6/1/15, “Greece: Strains within Syriza”) about the deepening splits within Syriza we expected, or indeed that Varoufakis could exit to “salvage” his leftist credentials.

But more tellingly, it also points to what we think are the most likely political developments in the wake of a yes vote that, on balance, we still think is likely to prevail. And indeed, on that note, polling shows the referendum voting intentions are indeed narrowing as we suggested it would.

*** First, we still disagree with much of the political punditry asserting that Tsipras is all but politically doomed and near certain to step down in the case of that yes outcome. A yes outcome after he campaigned so hard for a no vote will certainly leave him severely damaged politically. But we suspect he will survive and soon be limping his way back to Brussels, albeit without much if any of the leverage he had hoped for in his referendum gambit. ***

*** Equally likely, we think, are cabinet changes that will not only include Varoufakis heading off on his Harley into the Greek political sunset, but Defense Minister Panos Kammenos and the Independent Greeks heading for the exits as well. A call for new elections in September could also be forthcoming.***

*** But in the interval, a yes vote is likely to see the opposition parties rushing back to the table to bring Greece back into the Eurozone fold. And that, in turn, we think could quickly lead to a broader coalition, at least among the left of center political parties, especially To Potami, joining a Tsipras-led government.***

Indeed, one headline that should have garnered more attention than it did was the statement by Potami leader Stavros Theodorakis hinting at the party’s availability of a national unity government.  “All political forces must hold a responsible stance and a national unity government to be formed,” Theodorakis was quoted as saying. “We have ready the proposal. The initiative is on Alexis Tsipras. If he wants, he can be the prime minister.”

The Fate of the Greek Banks?

Beyond the politics in the post referendum world, the fate of the Greek banking system should also be considered. And here, while EU officials have for understandable reasons to now shown considerable restraint in speculating on the potential disruptive scenarios in case of a NO vote, we suspect the Cypriot example may be telling.

In the case of Cyprus, when capital controls were imposed on the financial system and Cypriot banks were restructured the European Central Bank ended up winding down one of the two main Cypriot banks that were initially deemed solvent. That aggressive wind down included hefty haircuts on unsecured bank deposits above 100,000 Euros as well as bank equity and subordinated bank debt.

We suspect that the same sort of cold calculated option may be on the table in winding down banks to reduce their number, and similar kinds of haircuts may be too much for a  cash strapped leftist government to resist in addition to going after the assets of  what is left of “the rich.”

Markets as well as the Greek population could thus be well served to remember that even as Tsipras campaigns on a pledge that all deposits are safe –  that sanctity of bank deposits was already officially crossed in the post-mortem of the crisis in Cyprus, when European officials enshrined a hierarchy of  “burden sharing” that defined and explicitly included unsecured deposits in case of emergency in the Bank Recovery and Resolution Directive.

And that, incidentally, is legislation that applies across the EU, and not just to countries within the Eurozone.

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