5 July, the Greek people voted overwhelmingly to reject the principles of the framework agreement that had been presented by the European Central Bank (the “ECB”), the International Monetary Fund (the “IMF”) and other international creditors. In a historic referendum, the Greeks sent a clear message that they did not want to continue with the austerity measures proposed by their international creditors and wanted more choice in how to run their own country.

But more than clarifying positions, the Greek vote has opened a Pandora’s Box of issues for all parties involved. Prior to the referendum, the IMF and ECB made it clear there was no point in negotiating, as the Greek Prime Minister, Alexis Tsipras, was not in a position to deliver any deal.  Now that Greece has voted, the referendum will serve to either set the boundaries for any negotiations - clearly the intended Greek strategy - or lead to a hardening of the ECB’s resolve, leaving an exit from the Euro as the only practical solution to Greece’s current cash liquidity crisis. Ironically, the referendum has given Mr. Tsipras a mandate to reject the austerity measures but not to leave the Euro.

Either way, a decision needs to be made soon, as Greece’s cash reserves continue to dwindle on a daily basis and general unrest in the country grows.


In 2001, Greece joined the Euro with the full support and backing of Germany and France. At the time, many questioned how Greece was economically qualified to become the 12th country to join the Euro. The rationale becomes clear, however, when one considers that Greece’s addition created another hungry market for the goods and services of the other member states, including Germany and France. It also provided a new financing opportunity. Accordingly, Greece’s borrowing escalated to what now stands at approximately €323 billion.

With the financial crisis of 2008, the realities of the Greek domestic economy and its poor record of tax collections became readily apparent to all.  Greece became known as one of the “PIGS” (Portugal, Ireland, Greece and Spain), the European countries who were unable to repay their debts. The first Greek bailout was therefore negotiated against the backdrop of an imminent collapse of the Greek economy and the contagion risk it could have across Europe. Since then, Greece has been lent in excess of €240 billion from the IMF and ECB, in addition to all the monies owed to its private creditors.

But despite numerous promises to reduce its debt, Greece continues to require considerable financial support from the rest of Europe.  After two-bail out programmes and many concessions, its creditors demanded  reforms to bring Greece in line with other European countries. These included cuts to Greece’s overly generous pension system, an increase in VAT, reductions in minimum wages, an increase in income and corporation taxes and, most importantly, improvements to Greece’s tax collection systems.

Not surprisingly, these proposals were met with resistance by Greek officials. In January 2015, the Syriza party, a left-wing government lead by the charismatic Prime Minister, Alexis Tsipras, swept into power on an anti-austerity platform. The new Prime Minister’s manifesto focused on achieving a write-off of the majority of the Greek debt, increasing employment and achieving a new, but more ‘acceptable’ deal with its creditors.


The concluding results of Sunday’s “No” vote have demonstrated a resounding message from the Greek people. From a political standpoint, the “No” vote is a huge political victory for Mr. Tsipras and should boost his confidence and reaffirm his party’s manifesto within Greece and the Eurozone.

Less clear are the implications of the “No” vote. On one hand, Mr. Tsipras has been given a clear mandate to adopt a firm stance in negotiations and to make it clear that neither he nor the Greek people will accept the harsh austerity measures proposed. On the other, and notwithstanding the “No” vote, Greece is still in favour of staying in the Eurozone. This gives rise to an interesting dynamic which may be an important factor in negotiations with other Eurozone leaders. Perhaps, the most interesting outcome of the referendum would be if it leads to a renegotiation of the European Stability Mechanism (“ESM”), although this will be difficult given the current hostilities between the Eurozone countries and Greece.


The current sentiment of the Greek people is most accurately summed up by the former Greek Finance Minister, Yanis Varoufakis, who said that “austerity is like trying to extract milk from a sick cow by whipping it.” The 2015 change in government was every Greek’s hope for an end to the constant ‘unreasonable’ demands of their international creditors and a solution to their ‘humanitarian crisis’.

Greece’s creditors do not, however, share the view of  the Greek people. In simple terms, the IMF, ECB and other Eurozone countries feel they provided an unprecedented level of support for Greece, only to be told that their actions are akin to economic terrorism and that it would be unfair to insist that Greece repay the countless billions that it borrowed. In simple terms, the tax payers of the Eurozone countries should “foot” the bill for Greece’s fiscal mismanagement.

In the recent weeks of tense negotiations, Greece’s creditors have stood firm with regard to the proposed reform programme, stating that Greece needs to pro- actively implement these reforms if there can be any hope of economic growth. The negotiations therefore stalled and little progress was made.

Since Greece’s debt currently stands at 180% of GDP, a solution to Greece’s problems clearly cannot be found without some form of external financial support.  And here lies the dilemma, as Greece’s creditors want to see the reforms implemented before restructuring discussions are commenced but Greece is unwilling to agree without some form of fundamental debt restructuring.


At its core, the Greek strategy relies upon the belief that the risk of contagion to the rest of Europe is worse than the cost of forgiving Greece all, or at least a meaningful portion, of its outstanding debt.  Essentially, Greece is playing a high-stakes game of poker and hoping that the IMF and the ECB will blink first. The problem is that Greece is running out of time, as the events of recent weeks have led to an escalation of the situation and a solution to Greece’s debt problem must be found quickly.

  1. IMF Payment Default

On 30 June 2015, Greece failed to repay its IMF loans, which in turn cross-defaulted their loans under the European Financial Stability Facility (“EFSF”), and further froze the remaining €7.2 billion of IMF liquidity that may otherwise have been available to them.

In this respect, it should be noted that the IMF is not the ECB and has a very different set of motivations and ‘investors’ that it has to answer to. While it is true that a payment default is not the same as an acceleration or enforcement (the latter being a political decision), Greece should not lose sight of the fact that the IMF is likely to adopt caution in its treatment of Greece to avoid setting a precedent for other countries. The threat of contagion risk to the Euro, which is core to the Greek strategy, may not therefore be as important to the IMF as it is to other Eurozone members.

Furthermore, such a payment default creates a dangerous precedent for Greece when it inevitably seeks out further funding support from the international community (perhaps, by way of a third bail-out).

  1. Emergency Liquidity Assistance

The second significant event was the ECB confirming  that no further funding support or Emergency Liquidity Assistance (“ELA”)  would be available to Greece. The impact of this decision is pivotal to the Greek economy and banking system. Had the ECB taken a more lenient approach, with more cash being put into the system, it would have alleviated the immediate pressure on the Greek economy. However, this was not the case and the Greek government immediately implemented emergency capital controls to prevent a panicked

outflow of what was left of its dwindling cash reserves. Ostensibly, this was to help save the Greek banking system from a meltdown, but it led to a host of problems that directly impacted the lives of every Greek citizen – from ATM withdrawals being limited to €60 per day per account, to delays in pension payments and limits on the use of overseas card payments and online transactions.

With the referendum results still fresh in everyone’s minds, it seems unlikely that there will be any changes until after Mr. Tsipras delivers his counter- proposal and the ECM/IMF have considered their response. Unfortunately, without renewed funding support, Greece may run out of cash before the end of the week.


One would hope that that in order to deal with the humanitarian concerns arising from Greece’s mounting economic crisis and failing banking system, both sides would re-commence negotiations but the potential for Greece exiting the Euro is increasing daily. That said, whether it will ultimately exit, will depend on a number of factors:

  1. Whether the Eurozone countries and Greece can renegotiate a mutually acceptable settlement?

The IMF and Eurozone members are facing a predicament - should they risk setting a dangerous precedent and agree to a more lenient approach, or should they remain firm and insist that Greece adheres to the austerity principles contained in the framework agreement. If it is lenient then it would lead to certain expectations in the future, whether in respect of Greece or other countries. If it remains firm, then it would serve as a clear example to others that it will not tolerate such behaviour and expects a country to whom it has given aid to meet its side of the bargain.

  1. How will Greece react to further proposals? Now that the referendum results are clear, we expect a Greek counter-offer to be made shortly,

although it is unlikely to be acceptable as Mr. Tsipras has previously stated that he is seeking a write-off of at least 30% of the outstanding debt. It will therefore be incumbent upon the IMF/EU to make further proposals (assuming they are willing) which will increase the pressure on Greece to either agree, or seek an alternative resolution (including a Greek exit from the Eurozone, or potentially even adopting a dual currency as an interim measure). Whether they do or not, however, will be determined by the ever changing landscape of the Greek economy and banking system.

  1. How much time is available to Greece? Greece is under increasing pressure to reach an agreement and any delay will undoubtedly lead to increased political and social unrest. The progress (or lack thereof) of the negotiations, against a backdrop of ever-diminishing cash reserves, the

prospect of having to make a further payment to the ECB on 20 July 2015, and a steady decline in tourism, will only serve to exacerbate the situation.

Further, many investors are generally agnostic as to whether there is a Greece exit. What is more relevant to them are the daily fluctuations in the currency markets, the impact that it is having on equity and bond prices, and the cost of hedging positions.  Many have already priced in the long term consequences of a Greek exit, but the current volatility is creating uncertainty which extends beyond just Greek investments and affects the market Europe-wide. For US Dollar investors, who are trying to hedge their currency risk on Euro investments, the current uncertainty is proving to be very expensive.

Where does this currently leave us?

There is still a lack of clarity as to how the referendum has affected the respective negotiating strategies of each side. While it served to establish clear boundaries (at least from a Greek perspective), it has also been tempered by the replacement of the outspoken and forthright former Finance Minister, Yanis Varoufakis, with the appointment of the more pragmatic, Euclid Tsakaloyos, perhaps as an example of Greece’s willingness to co-operate with its creditors to find a solution to its problems.  Whether this is too little too late, remains to be seen.

In contrast, the Eurozone countries have been very clear that they expect Greece to immediately and effectively implement reforms to bring it in line with other Eurozone countries and to be more responsible in dealing with its own problems. Therefore, it is up to Greece to come up with a new reform programme that would achieve the goals the Eurozone countries would expect to see.

The next few days will therefore be pivotal if a resolution of the Greek crisis is to be achieved. While Mr. Tsipras does not necessarily have a mandate to exit the Euro, unless he can find a solution quickly, it may be the only option left to him.