Greferendum: Choose Wisely & What You Need to Know

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This weekend brings on another pivital event in the political drama: The "Greferendum" (as Zero Hedge calls it). What-to-do-about Greece has been an issue plaguing the financial markets for years and perhaps, just perhaps, the vote and its outcome on Sunday will get the embattled country and the EU one step closer to a resolution. 

So at risk of telling the yet-again story yet-again, here's the latest from Zero Hedge, in several articles expertly glued together to cover current developments and various perspectives.

What It All Comes Down To On Sunday

As expected (and as tipped here on Thursday immediately after news broke that an IMF study conducted prior to the imposition of capital controls in Greece suggests debt relief for Athens is necessary if anyone hopes to create some semblance of sustainability), Greek PM Alexis Tsipras is now leaning hard on voters to carefully consider the fact that one-third of the troika has effectively validated the Greek government’s position on creditor writedowns. 

“This position was never proposed to the Greek government over the five months of negotiations, wasn’t included in final offer tabled by creditor institutions, on which people are going to vote on July 5,” Tsipras said in a televised address, making it clear to Greeks that the proposals they are voting on effectively do not reflect the views of the institution that is perhaps the country’s most influential creditor. 

“This IMF report justifies our choice not to accept an agreement which ignores the fundamental issue of debt,” he added, driving the point home. 

Clearly, this puts Europe, and especially Germany, in a rather unpalatable position. Many EU officials have for months insisted that IMF participation is critical if the Greeks hope to secure a third bailout. The IMF meanwhile, has stuck to a position first adopted years ago (something we’ve noted in these pages multiple times of late); namely that official sector writedowns will ultimately be necessary if Brussels hopes to finally put the Greek tragicomedy to bed. This means Brussels (and Berlin) will now be forced to choose between IMF involvement (which the EU says is a precondition for a deal) and haircuts (which the EU says aren’t possible).

Here’s Barclays – a major investment bank – with its own confirmation that the IMF may have assured a No vote over the weekend.

The document basically argues that OSI  [official sector involvement — e.g. the International Monetary Fund and the European Central Bank] is a necessary condition in order to secure sovereign solvency with a high probability. This means that before the IMF re-engages in any lending activities with Greece, OSI will be required in the form of NPV [Net Present Value] debt relief.

The timing of the publication of this report it is very important. Debt relief is something that the Greek authorities have repeatedly demanded; therefore, in a way this report can be interpreted as the IMF backing the Greek government's demands. By extension, it could also be interpreted as supportive of a 'No' vote, which is what the Greek government is campaigning for. 

We agree broadly with the analytical content of the report and the need for further OSI. This is in fact hardly new news. Europe has recognized since November 2012 that Greece needs further OSI to make debt dynamics sustainable with high probability. The IMF advice of an NPV haircut via a debt maturity extension (to 40 years) is in line with expectations.

However, the critical point is that the IMF now requires debt-relief before it engages in a new programme, which confronts Europeans with a tough political decision. Many in Europe, including Germany, considered OSI as a future carrot in exchange for reforms today following good programme execution. Debt relief was conceived as a part of a third programme to be negotiated possibly with a new Greek government.

At the same time, Germany has been adamant about the importance of IMF involvement in any financial support programme for Greece. Thus, Germany will now be confronted with a tough choice: to deliver on the IMF's demand, ie to engage in OSI negotiations in the form of NPV debt relief, or give up on IMF involvement. We believe that there is mounting support across other member states for the OSI discussion, therefore, we believe that Germany may not be able to resist such discussions any longer.

"I am guessing that this is a negotiating tactic ahead of the negotiations for a new programme for Greece. The IMF very well knows that a debt write-off is out of the question," one unnamed EU official told MNI. 

“The numbers are quite high, not in line with our assessment and our baseline scenario. We are examining different scenarios for the day after the referendum and provided the vote is Yes, we are ready to come up with solutions. But it is not going to be easy to agree. Certainly this report does not make it any easier," another source said.

It's easy to see why Europe is reluctant to accept the IMF's assessment. As discussed at length on Thursday, were Europe to go down the OMI road, Brussels would be opening Pandora's Box. Here's why:

By now it should be clear to all that the only reason why Germany has been so steadfast in its negotiating stance with Greece is because it knows very well that if it concedes to a public debt reduction (as opposed to haircut on debt held mostly by private entities such as hedge funds which already happened in 2012), then the rest of the PIIGS will come pouring in: first Italy, then Spain, then Portugal, then Ireland.

The problem is that while it took Europe some 5 years to transfer a little over €200 billion in Greek private debt exposure to the public balance sheet (by way of the ECB, EFSF, ESM and countless other ad hoc acronyms) at a cost of countless summits and endless negotiations, which may or may not result with the first casualty of the common currency which may prove to be reversible as soon as next week, nobody in Europe harbors any doubt that the same exercise can be repeated with Italy, or Spain, or even Portugal. They are just too big (and their nonperforming loans are in the hundreds of billions).

As for the IMF's position, Barclays notes that a permanent default by Greece would not be a trivial event, thus providing further incentive for the Fund to push for EU writedowns:

With the IMF’s total resources being roughly USD760bn – USD420bn of which are considered the ‘forward commitment capacity’ – the IMF has the firepower to ‘survive’ a permanent default of Greece while maintaining sufficient resources to be able to lend out fresh credit for countries in need. However, it would make a significant dent in the ongoing IMF finances – eg, the interest paid on IMF loans is used to cover IMF’s operational cost – and would very likely create intense debate about Europe’s relationship with the IMF and the balance of power between DM and EM members. One question could also be whether or not the euro area IMF members should not in some way be liable for the outstanding Greek debts. In turn, this would also intensify a debate about the sharing of liabilities/solidarity within the euro area and the EU.

So, thanks to a well-timed IMF report, Tsipras can now frame Sunday's plebiscite as a simple Yes/No vote on Greece's debt pile, which makes it far easier to vote "no." 

"Do you think Europe should forgive your debt, check box 'Yes' or 'No'." 

That should be an easy choice, although it depends upon the Greek public understanding the significance of the IMF's position which, as indicated above, Tsipras is doing his very best to facilitate. The bottom line: Sunday's vote is about whether Greece will agree to remain a debt colony of Germany, pardon Europe, even as the IMF (and, paradoxically, Germany) agrees with Athens that the country's debt is unsustainable.

"No" means a lot of pain now and recovery later.

"Yes" means less pain now but no hope of recovery ever. 

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Choose wisely…

IMF Bolsters Greek "No" Vote, Says Country Needs Much Bigger Debt Haircut

If the IMF were a Greek citizen, it would vote "No" in this weekend's referendum.

According to a report prepared prior to capital controls and the banking sector meltdown, any deal that included creditor concessions on fiscal reforms would mean Greece's debt load would have to be written down, as the country would need at least €60 billion in new financing. 

This should not come as a surprise to our readers because long before Greece returned to the spotlight we reported last October, citing an S&P report, that by the end of 2015 Greek financing would be at least €43 billion. What we said then: "As for Greece, it appears that suddenly the idyllic image of its recovery is about to be torn to shreds and the Syntagma riotcam will have to come out of hibernation."…

Greeks Split On Greferendum As Credit Suisse Says "No" Vote Defies "Rationality"

With just two days to go until Greeks decide their fate in the eurozone, the country is split down the middle, a new poll shows. The survey, commissioned by Bloomberg and conducted by the University of Macedonia Research Institute of Applied Social and Economic Studies, shows that “43 percent intend to vote ‘no’ to reject the austerity demanded by creditors in exchange for financial aid, while 42.5 percent back a ‘yes’ to accept the conditions.” 

Bloomberg goes on to say that support for a ‘no’ vote has dwindled since Tsipras first announced the plebiscite last week, which seems to suggest that the bite of capital controls has quickly forced many Greeks to reconsider whether the benefits of standing firm in the face of overbearing creditors truly outweigh the economic costs of an EMU exit. 

[Ilene: The closure of banks and inability to get cash out of ATMs (the limit is now 60 euros) was hardly a surprise. But given the lines at ATMs, bank closures and limits on withdrawals must have caught many people off-guard. At least some of the Greeks who say they will vote “no” on the referendum do not want to return to the Drachma, although a “no” vote seems to imply a willingness to return to the Drachma if the EU doesn’t make further concessions.]

The narrowing lead for the “no” side comes as IMF research appears to support Tsipras and Varoufakis’ contention that any feasible Greek deal should include debt relief.

As we said on Thursday, the report (which was prepared prior to capital controls and the banking sector meltdown) shows that any deal which includes creditor concessions on fiscal reforms would mean Greece's debt load would have to be written down, as the country would need at least €60 billion in new financing. Subsequently, the media and sell side chimed in. Here’s Barclays for instance: 

The IMF released yesterday a document with a revised debt sustainability analysis for Greece. The document basically argues that OSI is a necessary condition in order to secure sovereign solvency with a high probability. This means that before the IMF re-engages in any lending activities with Greece, OSI [official sector involvement] will be required in the form of NPV [Net Present Value] debt relief.

The timing of the publication of this report it is very important. Debt relief is something that the Greek authorities have repeatedly demanded; therefore, in a way this report can be interpreted as the IMF backing the Greek government's demands. By extension, it could also be interpreted as supportive of a 'No' vote, which is what the Greek government is campaigning for.

We’ll see over the weekend, if the “no” vote is bolstered by the IMF’s findings. 

Meanwhile, Wall Street continues to speculate on what happens in the event of a “no” or worse, a tie. The following is excerpted from Credit Suisse "Greece: A Thread In The Labrynth."

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The Result Of A "No": A Live Test

We believe that in the case of a ”No” vote in the referendum that the creditors will reject any further deal with near certainty and the only outcomes are either a systemic crisis or a contained idiosyncratic crisis.

A particularly bad scenario for Greece would be some sort of split vote, e.g., 51% voting “No”. We think Tsipras would likely claim to have won the backing of his policy by the electorate – assuming he campaigns for a “No” till the end – while nearly half the population would have voted in favor of the creditors’ deal. This could cause unrest domestically in Greece, while the creditors would probably be less inclined to acknowledge Tsipras’ “victory” under such circumstances. A relatively low participation rate would further reduce the credibility of a marginal “No” vote, in that regard.

We again want to be clear: “leaving EMU” is not a policy choice and, if enforced by referendum, materially reduces Greece’s freedom of action. Introducing a new currency is a pipe dream and the likely result is a broken financial system reliant on a neighbor’s currency (the euro) and banking system. 

If the result of the Greek referendum is a “No” and the situation is not immediately remedied (which we would not expect), the Greek people will probably have taken the opportunity to illustrate how illusory the whole idea of “exit” actually is. How that unfolds determines whether the situation systematizes immediately. This is because the choice is not “do you accept the core’s terms your government has rejected?” Rather, it is “do you want Greek banks to function independently?” and, de facto, do you want to be able to use the cash machine tomorrow? This is the nature of “Grexit”; it is not a choice to circulate a shiny new devaluation mechanism, it is a decision to reject the (local, to begin with) financial system and start again. 

We have always pointed out that the new “currency” mismatches involved in any attempt to exit the euro would be so "toxic" for the banking system as to make it not a practical alternative. It is certainly not a way to avoid default. Rather, an attempt to exit is a way to default, at the expense of making that default systemic and so more costly. We are seeing this right now, with anecdotes of large dislocations and the reality of a closed banking system. 

This fact seems to get less than its fair share of attention. The Greek banking system is closed. How does it reopen given a “No”? So “No” should be a dominated policy option and a properly informed Greek public should rationally vote “Yes”. Yet we cannot confidently give it more than a 50:50. The closed banking system imposes real pressure and a deadline. The 20 July date we have always pointed to now has real teeth; three weeks is the absolute maximum we would expect Greece to be able to function in this state. 

The “loss of sovereignty” resulting from this dilemma could be a dominant consideration leading to an irrational outcome (“better a day as a lion…”). As always, we have to be VERY careful with the “rational player hypothesis” in these situations. And the core pointing out that the question can be reframed as “do you want a banking system”? and “do you want to stay in the euro” could be criticized as "moral blackmail", but it is the reality of the implications of having joined a currency area. The time for these concerns was in the run-up to 2001. We are all learning about these realities and Greece could again be an illustrative test case. We stick to our view that “nobody leaves” and any new drachma (which we strongly doubt) would effectively be a transitory default mechanism on the way to an economy that was euro-ized without the votes on the ECB GC. We could call it the “Panamization” of Greece. But where is the 13%-capitalized banking system which is required going to come from? At a minimum we would see €40 billion of untainted capital being required. Some of it could come from the existing capital structure under resolution but we believe that the balance could not come from Greece itself (a state in a serious state of default) without triggering immediate collapse and returning to the path of the new arrangements being a default vehicle on the way to euro-ization only now without a domestic banking system at all). 

The far more likely outcome, in our view, of an attempt to leave (i.e., of a “No”) is a banking system that can only open under foreign (nationalized) ownership. This seems to be a very likely step given the apparent intention of the core to honor guaranteed deposits. But all of this would of course be contingent on some form of cooperative outcome. In the absence of that—and relations are already manifestly more strained; a change of government may help—we would have to suspect that Greece’s EU membership would be under threat…

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Summing up, Credit Suisse believes a "no" vote is effectively a vote for economic catastrophe. The banks would, for all intents and purposes, have to be nationalized by Germany (which, given the Greek banking sector's complete reliance on the Eurosystem for funding, and given Berlin's TARGET2 position relative to the rest of the EU, would simply be to make official what has already been going on for years), and the (re)introduction of the drachma would not only be a disaster, but is in fact an unworkable "pipe dream."

In short, the bank says that if Greeks were "properly informed", they would not, in their right mind, vote "no."

So perhaps we have a new way to characterize Sunday's vote: a sanity check for the Greek populace.

US Pushed For IMF Greek Haircut Study Release After Euro 'Allies' Tried To Block

The timing of the release of The IMF's 'Greece needs a debt haircut no matter what' report this week was odd to say the least.

Being as it confirmed everything the Greek government has been saying and provided the perfect ammunition for Tsipras to spin Sunday's Greferendum as a Yes/No to debt haircuts – something everyone can understand (and get behind). It is understandable that, as Reuters reports, Greece's eurozone allies tried to block the release of the damning report this week but the Europeans were heavily outnumbered and the United States, the strongest voice in the IMF, was in favor of publication, sources said. While The IMF concluded, "Facts are stubborn. You can't hide the facts because they may be exploited," one wonders if this move merely reinforces Goldman's concpiracy theory.

Euro zone countries tried in vain to stop the IMF publishing a gloomy analysis of Greece's debt burden which the leftist government says vindicates its call to voters to reject bailout terms, sources familiar with the situation said on Friday. As Reuters reports, publication of the draft Debt Sustainability Analysis laid bare a dispute between Brussels and the Washington-based global lender that has been simmering behind closed doors for months.

At a meeting on the International Monetary Fund's board on Wednesday, European members questioned the timing of the report which IMF management proposed at short notice releasing three days before Sunday's crucial referendum that may determine the country's future in the euro zone, the sources said.

There was no vote but the Europeans were heavily outnumbered and the United States, the strongest voice in the IMF, was in favor of publication, the sources said.

The Europeans were also concerned that the report could distract attention from a view they share with the IMF that the Tsipras government, in the five months since it was elected, has wrecked a fragile economy that was just starting to recover.

"It wasn't an easy decision," an IMF source involved in the debate over publication said. "We are not living in an ivory tower here. But the EU has to understand that not everything can be decided based on their own imperatives."

The board had considered all arguments, including the risk that the document would be politicized, but the prevailing view was that all the evidence and figures should be laid out transparently before the referendum.

"Facts are stubborn. You can't hide the facts because they may be exploited," the IMF source said.

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Quite simply this should be horrifying to, not just the Greeks (who just discovered their supposed 'allies' tried to hide the truth from them and in fact negotiated in bad faith), but to all Europeans who by now must realize the union is not for them, it is for the few ruling elite and their corporate and banking overlords.

Isn't it time to Just Say No, if not to anything else than to being controlled by an unelected cabal of oligarchs whose only interest is making sure the wealthy get wealthier?

Of course, taking a step back from the table, it is clear that a forced decision by Washington against the interests of its European allies – that is likely to engender more chaos and strengthen Greece's ability to destabilize Europe – must have been done for 'another reason.' Perhaps after all is said and done, the powers that be need chaos, need instability, need panic in order to ensure the public gratefully accept the all-in QE-fest that they want.

Massive "No" Demonstration Floods Athens' Syntagma Square As Tsipras Speaks

Shortly before Greek PM Tsipras spoke at today's huge "No" rally on Syntagma square, scuffles in the crowds of protesters broke out and police have resorted to stun grenades and tear gas.

As Reuters reported, "Greek police threw stun grenades and scuffled with protesters in central Athens on Friday, as a rally got under way in support of a 'No' vote in a Sunday referendum on whether to endorse an aid deal with creditors. The scuffles involved a few dozen people, many dressed in black and wearing helmets but quickly appeared to calm."

Luckily, the violence was scattered and promptly dissipated.

Instead it has been replaced with one of the biggest people gatherings on Syntagma square in history:

I've stood on this roof a few times over the years – and this is as big a crowd as I can remember. #oxi #greece pic.twitter.com/1vzUlEd2FH

— Mark Lowen (@marklowen) July 3, 2015

Greek Banks Considering 30% Haircut On Deposits Over €8,000: FT