A yes vote – the more likely outcome, according to the polls – would mean the fall of the Syriza-led government. Prime minister Alexis Tsipras would have led negotiations his party regards as a failure. He would have campaigned for rejection of the creditors’ proposals. He would have lost, in Brussels and at home. A general election would follow.
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But what government would be elected, and what happens while it is formed? A nightmarish outcome, in the eyes of Brussels and Berlin, would see Syriza returned, which is not inconceivable because the Greek opposition is divided and the electoral system awards extra seats to the largest party.
But even if a pro-EU centrist alliance were to prevail, the talking would have to start afresh. The creditors, one assumes, would be honour-bound to offer the same terms as those that were on the table last week. But the add-on, Greeks might reasonably assume, would be debt relief since Jean-Claude Juncker, president of the European commission, hinted at it in his meandering appeal for a yes vote.
But agreement on debt relief among the creditors is probably not going to happen quickly or easily. The question has been dodged consistently over the past six months despite the prodding of the International Monetary Fund. Eurozone hardliners, after a yes vote, might argue that such a politically toxic issue can be deferred yet again to keep non-Greek electorates sweet. Cue deeper resentment in Greece after a summer of disruption and capital controls.
A no vote would be even messier. Syriza would still be in power but Tsipras would not be offered more generous bailout terms. But nor – presumably – would he think he has a mandate to lead Greece out of the eurozone. He has insisted that next Sunday’s referendum is on the narrow technical question of whether to accept last week’s proposals.
In that case, other eurozone leaders, if they mean what they say about a no vote implying exit from the single currency, would have to find a way to expel Greece. The quickest route would be for the European Central Bank to cut off all support for Greek banks, creating chaos on the ground.
At that point, US politicians might be unable to contain their frustration. They might be screaming at their European counterparts to find a way to avoid a crisis that could spill into the entire eurozone and inflame tensions in Ukraine.
Monday’s reaction in financial markets was mild . Share prices fell across Europe but not wildly. Yields on Spanish, Italian and Portuguese debt rose but remain miles away from crisis levels. Investors were already thinking of their comfort blanket – intervention by the ECB if the Greek plot turns nasty.
It is clearly possible that relative calm can last until Sunday and beyond. But it seems unlikely: stock markets have a long record of underestimating political risks until they materialise. Growing concern in the US should be ringing alarms.
A bad reason for a central bank to cut interest rates is to prop up a falling stock market. The People’s Bank of China would never admit that was its game as it cut lending rates for the fourth time since November. But, to the outside world, this was no coincidence: share prices had fallen 20% in a fortnight, including a big whack on Friday, and Beijing felt it had to act. If that was the thinking, it backfired. The Shanghai Composite fell another 3.3% and the Shenzhen index lost 6.1%.
Tomorrow is another day, but the danger in intervention is obvious. If it works, investors believe they have a licence to speculate, creating perfect conditions for a bubble. If it fails, a central bank looks powerless. In this case, the Chinese also look panicked. Local share prices, even after the falls of the past few weeks, are still up by almost a third since January. What’s the problem supposed to be?
Martin Weale would like members of the Bank of England’s monetary policy committee to have 100 votes, not just one, so they can better express the nuance of their views on interest rates. The idea will never be adopted, of course, and thank goodness. Harry Truman had it right: “Give me a one-handed economist. All my economists say, ‘on the one hand … on the other.’”