Not only did the Greek government and its creditors go down to the wire with their bailout negotiations, they went beyond it and they are still moving. Last Friday, with no agreement in sight and the IMF repayment deadline just four days away, the Greek contingent walked out of the talks and the prime minister called a referendum for this coming Sunday.
The institutions – the International Monetary Fund, the European Commission and the European Central Bank – were taken by surprise, as were financial markets. They were less surprised when Greece failed to make its €1.6bn repayment to the IMF on Tuesday but there was more to come. The following day the Greek prime minister revealed a letter he had sent to the institutions accepting the terms of their proposals, subject to certain amendments. It was rejected out of hand by euro zone leaders, with the German chancellor saying there could be no more discussion until after the referendum. Mr Tsipras’s reaction was to retract his letter and call on the Greek people to vote No in the plebiscite.
No to what though? The referendum will ask the electorate whether Greece should accept the terms imposed by the Troika, including the imposition of continued austerity (Yes), or reject them (No). On the face of it, voters will not be asked whether they want to remain in the single currency: everyone agrees that the majority does want to stick with the euro. However, the Greek opposition and the Troika say that is exactly the question being asked. Mr Tsipras disagrees, insisting that a No vote would put Greece in a stronger negotiating position.
Two days before the vote the opinion polls show 43% of voters going for Yes, 43% intending to vote No and 17% undecided. (The bookies have Yes as the odds-on 1/2 favourite.) So nobody knows what to expect other than that, whatever the outcome, the situation on Monday is likely to be at least as messy as it was a week ago. A Yes would mean the departure of the Greek finance minister and probably also of the prime minister. A No would almost inevitably lead eventually to Greece returning to the drachma.
With all that uncertainty it would be reasonable for investors to be running around like headless chickens, in fear of a breakup of the euro. But they aren’t. They have had five months’ preparation for this and they are taking it all with exceptional aplomb. In the last week, although the euro has fallen by one and a quarter US cents, it has remained steady against sterling and strengthened by an average of 0.4% against the other dozen most actively-traded currencies.
Where it goes next week will depend on the good people of Greece. If they vote Yes to more years of sackcloth and ashes it would be fair to expect a relief rally for the euro. If they vote No to the EC’s economic imperialism it would be equally reasonable for the euro to fall. Either way, it will take Greece a while to get back to normal but it probably won’t take long for the euro to regain its composure.
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