RaboResearch - Economic Research

Pre-referendum Greece: a road map for the months ahead

Economic Report

  • Referendum will not end uncertainty over Greek saga, making it unthinkable that Greek banks are reopened on Tuesday.
  • The most promising scenario is the one in which the referendum results in a ‘Yes-vote’ and Tsipras and Varoufakis resign. This still is the most likely scenario, though polls suggest it will be a close call.
  • The most worrisome scenario is the one in which the referendum results in a ‘No-vote’. In that case the risk is large that no deal will be agreed upon anymore and that Greece eventually leaves the eurozone.
  • As long as the ECB continues to approve ELA, Greece will stay in the eurozone. ELA decisions are greatly conditional on the outlook for a deal and as such partly on the referendum outcome.
  • A failure of the Greek government to repay the ECB EUR 3.5 bn the 20th of July, could but need not be the end of ELA. The decision is up to the ECB.
  • Contagion to other eurozone countries following a Grexit should remain limited, at least in the short term.

Greece, moving towards the end game?

The referendum results will provide guidance on how the Greece saga will continue, though it will not end uncertainty on how the story ends.

Sunday, 5 July the Greek people will vote in favour of or against the latest austerity and reform package that the EU and IMF demanded in exchange for financial support. The government claims the outcome will determine whether the government will accept the latest offer of the institutions or if it will fight for better terms. The outcome of the referendum does, however, not end uncertainty about whether a deal will indeed be reached or not, not even if the Greeks vote Yes, as we will explain in more detail below. One major issue of concern is the likelihood that the latest offer of the institutions is no longer on the table. The economic outlook on which the offer was based has seriously deteriorated since the installation of capital controls. Accordingly, austerity measures need to be stepped up to comply with the required primary surplus. Furthermore, new negotiations will be over a new (third) bailout package in which the amount of financial support being debated is much higher than under the last tranche of the second bailout package. Consequently, reforms demanded by the institutions will be tougher. This would imply that again further intense negotiations are necessary. Meanwhile, there will still be uncertainty about whether the IMF stands ready to appear at the negotiating table or not; both will likely have rather substantial implications for the duration of negotiations.

The bottom line is that regardless of the referendum outcome, the risk that talks over a third bailout fail either rapidly or somewhere down the line cannot be excluded nor taken for granted; as uncertainty over the course of actions remains extremely high. As such, the referendum results will not conclude Greece’s Odyssee. Yet, they might provide guidance on the likelihood the eurozone story continues with or without Greece.


For the weeks and months ahead, we see three broad scenario’s. Developments and political choices may let Greece move from one scenario to another as we will explain below. All scenario’s take the referendum outcome and the government’s explicit ‘no-campaign’ as a given. The three scenarios have different implications for the ECB’s response in terms of continued approval of ELA, the timing of the removal of capital controls, and the Grexit risk and related contagion effects.

Scenario 1: the cooperative scenario

The referendum results in a ‘yes-vote’ and both Tsipras and Varoufakis step down.

This outcome hinges on the ‘yes-vote’, which is currently the most likely scenario, though polls indicate a relatively close call. In addition to the referendum outcome, this scenario hinges on Tsipras and Varoufakis following up on their announcement of linking their political fates to the referendum outcome. It seems rational that they do, but it is not a given.

An interim cabinet of national unity may negotiate a third bailout, after which Greece has renewed general elections. The outcome of which will determine whether Greece stays in this scenario, or slides to another scenario (see the notes on scenario 2 below).

We note that at this point it is still uncertain who will join at the negotiation table at the creditors side. This could seriously hamper and delay negotiations. In short, the IMF will likely only join in case of increased Greek debt sustainability. This translates into further debt relief or haircuts agreed on by Europe, which would be very difficult to get passed in most national parliaments. At the same time, amongst other countries, Germany has stated it will not agree on a deal if the IMF is not in. So even in the most positive scenario it is far from certain that a deal can be reached in just a few weeks.

Scenario 2: the inconclusive scenario

The inconclusive scenario may last for some time, but will typically lead to migration towards either scenario 1 or scenario 3.

a) A ‘yes-vote’, but Tsipras and Varoufakis to remain in office.

The stability of this outcome hinges on the Troika’s [1] appetite to resume talks with Tsipras. This is not the likely result as Tsipras has seriously damaged the trust of the other European leaders. Hence, this outcome has a large risk of quickly migrating to scenario 3.

Even if such talks were to commence successfully, the risk remains that Tsipras at some point relapses into prior negotiation tactics, resulting in renewed stalling of European support somewhere down the line and migration to scenario 3.

Breakdown of these talks may also force Tsipras to call for general elections and see the opposition win, allowing migration to scenario 1.

b) A ‘yes-vote’, Tsipras and Varoufakis to step down. But substantial support for SYRIZA to remain. An outcome that has the risk of migrating to scenario 3 after elections and a SYRIZA win therein.

An interim cabinet of national unity may negotiate a third bailout, after which Greece has renewed general elections. Even though the referendum may have 50%+ ‘yes-votes’, SYRIZA may still win the general elections with as little as 35% of the popular vote due to the 50 seat bonus for the largest party in the elections. This could migrate Greece into scenario 3 or keep it in the inconclusive solution. Obviously, a SYRIZA win would imply ongoing uncertainty surrounding the implementation of the package. But, if the party and especially its election list is reshuffled upfront to remove the hardliners, the SYRIZA that wins would likely be more cohesive and might be more willing to cooperate with Brussels and Berlin.

Scenario 3: the non-cooperative scenario

The referendum results in a ‘no-vote’. Tsipras remains in office and feels emboldened towards its creditors by the referendum outcome. There is no room for successful continuation of bailout negotiations, though some brave or maverick attempts may be conducted.

This outcome hinges on the ‘no-vote’ which is currently not the most likely scenario, though polls indicate a relatively close call. Prior to the announcement of the referendum, polls indicated that a substantial majority of the Greeks did wanted to stay within the eurozone, though.

[1] Formally, the Troika no longer exists after the expiry of the second bailout on June 30th 2015.

What about the ECB’s response and ELA approval?

Scenarios 1 and 3 have relatively straightforward implications for the ECB’s Governing Council’s decision to maintain its Emergence Liquidity Assistance (ELA) approval.

  • In the non-cooperative outcome (scenario 3) the ECB is likely to have to withdraw its approval for ELA; there is little hope of a third bailout and barring perhaps the nationalisation of the main part of its banking sector, the Single Supervisory Mechanism cannot but advise the ECB’s Governing Council to consider the Greek banks to be insolvent.
  • In the cooperative outcome (scenario 1), the ECB can continue its approval of ELA in the full expectation that a third bailout agreement will yet be reached. Even in the case disbursement of funds will not be in time to repay the ECB EUR 3.5bn 20 July, which is highly likely, ELA will likely stay in place as the outlook for repayment at a later stage is positive.

The ECB’s reaction is least clear cut in the inconclusive scenario 2. Come July 20th –when a EUR 3,5bn bond redemption to the ECB is due– Greece may not yet have completed negotiations on a third bailout. The perspective of completing negotiations is inconclusive. The ECB’s response in this situation is decisive on how sovereign defaults in EMU are ultimately resolved.

  • The ECB may continue its approval of ELA regardless of the absence of a completed third bailout package. While to us it seems hard to conceive of the ECB choosing this course of action and retain its credibility, it may feel forced to continue to do ‘whatever it takes’ to preserve the euro as it has done before; or does not want to assume the political mandate of de facto forcing a country out of EMU; or it deems this necessary for the preservation of financial stability in the eurozone, among possible other reasons.
  • Or it does withdraw its approval of ELA, thereby de facto forcing Greece to leave the eurozone. The ECB may motivate such decision because it finds itself unable to credibly continue to assume that Greeks banks are solvent, or because it assumes that such action will put pressure on Greece to accept the conditionality on a third bailout package, among possible other reasons.

In the former case, the ECB creates the precedent that sovereigns in the eurozone may default on their debt, whilst the ECB continues to act as a lender of last resort for its banking sector. The road to sovereign default is probably sufficiently unattractive as not to create perverse incentives for other countries. Greece remains in the eurozone.

In the latter case, we probably (though not with certainty) move into the precedent where sovereign defaults in the eurozone ultimately lead to its exit from the common currency. In this situation, namely, banks are cut off from liquidity and Greece can only reinstate a lender of last resort by introducing its own currency. The euro is no longer irreversible, but the road to exit is sufficiently long so as not to immediately cause wider exit fears over other former crisis countries. Grexit results. The irreversibility of the euro is lost and the effects of this may be felt far into the future, when investors know that a country in severe crisis may ultimately abandon the common currency (Weernink, 2014).

What about the banking sector?

Capital controls and deposits withdrawal limitations cannot be removed unless either one of the following conditions is met:

  • Greece moves into the cooperative scenario and completes negotiations on a third bailout package (including fresh money to recapitalize its banks). Capital controls cannot be lifted before ELA is raised or funds to recapitalise banks are disbursed;
  • Greece moves through the non-cooperative scenario and a Grexit results, after which its independent central bank (independent from the European System of Central Banks, that is) can continue its role as a Drachma-lender of last resort for its banking sector.

In short, it is entirely unrealistic to expect capital controls and deposit withdrawal limitations to be lifted next week Tuesday. 

Either in the non-cooperative scenario 3 or in a protracted stay in the inconclusive scenario 2, Greece may be forced to nationalise the major part of its banking sector. It is unclear at best whether this would allow the ECB to continue ELA whilst it is clear that this cannot resolve the fact that banks run out of notes and coins. Hence nationalisations will not relieve the necessity to maintain capital controls and deposit withdrawal limitations.

What about the contagion effects of the Greek saga?

As we noted before, contagion to other eurozone countries following a Grexit should remain limited as the ECB stands ready as the lender of last resort for their (solvent) banks whilst OMT is available in case sovereign bonds markets are the object of speculative withdrawals (Kalf and Wijffelaars, 2014).

The wider contagion effects will predominantly follow from a pronounced risk-off response in financial markets and hit the more vulnerable emerging markets, like Turkey and South Africa, but may also reach Brazil.

The contagion effects of the Greek situation also depend on the ECB’s response. In case we move into the precedent where Greece defaults within EMU, but the ECB continues to act as lender of last resort for its banks, contagion effects via funding conditions of banking sectors in other EMU countries are likely to be considerably weaker, or absent altogether, whilst banking sector contagion will become delinked from stress in sovereign bond markets. On the other hand, ‘exit risk’ may be priced in into sovereign yields of the former crisis countries.


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