From the Desk of Robert Dye

More Thoughts About Greece

When I last wrote about Greece, at the end of May, I said that the probability of Greece exiting the European Union soon was about 25 percent. The failure of recent negotiations between the Greek government of Alexis Tsipras and eurozone finance ministers to extend the bailout program for Greece has changed that outlook. The lack of progress in the negotiations resulted in a significant move by the European Central Bank. The ECB statement of June 28 says that it will not remove the ceiling on emergency liquidity assistance to Greece. They will not backstop a run on Greek banks. That precipitated the capital controls on Greek banks that went into effect today, which severely restrict the flow of currency within the Greek economy. Restrictions on withdrawals of cash from banks and the insistence on cash payments by many hotels, restaurants and shops will hurt tourism as the summer season hits full swing. The economy will rapidly decelerate. Loan defaults will increase. Stress on Greek banks will multiply. The ECB says that it stands ready to reconsider its decision. It is waiting for the results of the referendum in Greece now scheduled for Sunday. The referendum is expected to be worded as a yes or no vote on the terms of the bailout package for Greece. It is being characterized as a vote for the euro or for the drachma. A yes vote for the bailout terms, and for the euro, could mean the end of the Tsipras government. It could also allow the ECB to reopen support for Greek banks. This will not be enough to salvage the summer tourist season. It is already severely damaged. But it could allow Greece to stay in the EU. The odds of a yes vote may be slightly greater than 50 percent. A no vote looks like it paves the way for Grexit. It’s going to be an interesting week.

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