The most important news this weekend is not that the Greek government has called a referendum. It is that the Greek government has not accepted the bailout proposal of its creditors, Financial Times reported.
The second Greek programme will therefore expire midnight on Tuesday. Greece will be without a programme and without market access from Wednesday.
The programme that was proposed by the creditors would have prolonged the Greek recession by several years. Grexit, a Greek exit from the eurozone, would have more negative economic consequences in the short run. But at least there would be some upside for Greece eventually. The creditors programme was an economic version of Dante’s hell. It would have brought about the total economic destruction of Greece.
So what should happen now? The first thing to note is that the referendum will be meaningless. Even a “yes” vote will not bring the programme back. And I cannot see a political majority in all the creditor countries for a new programme. The Germans will not do anything without the International Monetary Fund (IMF). And the IMF, in turn, will get defaulted on before the middle of the week.
My working assumption is that the European Central Bank (ECB) will now begin to reduce the liquidity lifeline for Greece, the so-called Emergency Liquidity Assistance (ELA). It is my understanding that the ECB is already pushing the legal limits of what it can do, so we are very likely to see the forced imposition of capital controls in Greece, to be followed by the introduction of a parallel currency to allow the Greek government to pay wages and pensions, Financial Times journalist Wolfgang Munchau reported. Unless the EU and the ECB find a quick way to sort out the Greek banking system, Greece may be forced to introduce a national currency eventually.
The referendum can hardly undo this. If the Greek government had called a referendum before the expiry of the programme, it would have been different. But doing it this way vastly increases the probability of a Grexit. The referendum will be about a proposal that no longer exists for a programme that will have expired. Out of a drama rises a farce.
The question now is: will the ECB pull the trigger? And if so, will they do it on Monday, on Wednesday, or after the referendum? Will the eurozone have a default-inside-the-eurozone plan, which would involve dealing with the banks? I guess the answer to the latter is no, the journalist noted.
So this looks like we are headed for a rupture. It would not be a good outcome. Even now there are better alternatives. It is not the worst outcome either. But for the rest of the eurozone, the nightmare is only just starting.