The IMF has been left standing with its finger in it’s mouth after Greek Prime Minister Alexis Tsipras unexpectedly called a Greek referendum on whether to accept further austerity and encouraged the Greek people to vote “No”. The prospect slams the possibility of a Grexit firmly on the negotiation table and Monday may see the unexpected turn painted red in market charts.
Greek Prime Minister Alexis Tsipras has called a referendum on whether Greece should accept demands by the country’s creditors the IMF, ECB and European Commission. The decision comes on the heels of failed talks with the three lenders, after they demanded Greece increase taxes on workers, raise retirement age to 67 and impose a value-added-tax rate of 23% on all products and services in the recession-ridden country.
It’s Up To You, The People Of Greece
In a televised speech after midnight, Tsipras informed fellow Greeks of the July 5 vote and defiantly declared the IMF’s take-it-or-leave-it offer as an insult and violation of European Union rules. Deputy Foreign Minister Euclid Tsakalotos told Bloomberg the Greek government will not impose capital controls and that banks will remain open for business throughout.
Socialist Tsipras was appointed to office by a populist vote when increased European Union demands for budget cuts deepened the country’s six-year economic depression. Members of his Syriza party have previously advocated defaulting rather than yield to imposed austerity. Greek ministers, including the Chief of Defense, today urged 11 million Greek citizens to vote “No”.
Our partners unfortunately resorted to a proposal-ultimatum to the Greek people, I call on the Greek people to rule on the blackmailing ultimatum asking us to accept a strict and humiliating austerity without end and without prospect.
A Push Too Far
Markets have been nervous about the Greek situation for months but the assumption, all along, has been that a “deal will be made eventually”. With Tsipras and his party members defiant, and having been made to drink from the gutter, Greek citizens have everything to gain from exiting the European Union. Markets are expected to reel on Monday morning – the unthinkable now having transpired.
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Tsipras refused to buckle to increasingly unreasonable demands, at every Greek concession, made by the IMF and European Central Bank, accusing them of “prolonging punishing austerity”. The IMF, ECB and European Commission are now the losers in the stand-off, having under-estimated Greece’s negative sentiment as the country walks away with a default but with its pride and self-determination intact. It does appear odd that the three creditors had pushed an all-or-nothing Greece further into a corner, when they could have made good on at least some of their loans. Blame for the fallout in the European Union and the world economy will now fall primarily to Christine Lagarde and Mario Draghi after even hardened economic hawks began commenting on the unreasonable terms being imposed on Greece.
The last referendum in Greece was called in 1974, when the country emerged from a military coup and Greeks voted against monarchy in favor of becoming a Socratic republic.
Grexit Guaranteed?
A “No” vote will see Greece relinquish its EU membership and fore go the weakening Euro currency. The ECB will be expected to cut emergency funding to international banks in the country, with an immediate liquidity drain opened up in the sector. From having been a victim in the proceedings, Greece has now turned the tables on the unsuspecting creditors and their business interests in the Eurozone. This is exactly the “contagion” liquidity event that many market commentators have feared. A “Yes” vote will imply a vote of no-confidence in Tsipras and may force early elections. Somehow, this seems the least likely outcome.
A chasm opened up in the European Union periphery today – something that most economists and market participants felt was unlikely. The full force of the scenario may be delayed as politicians and talking-heads propose the possibility of Greek citizens electing to stay in the European Union. Yet, why would they choose punishment over independence and debt-free self-determination?
Monday’s CCN.LA Global Economic Outlook will feature market reaction and any developments in this story.
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