The Eurogroup is wrong to reject the Greek Prime Minister’s announcement of a referendum on whether to accept a bailout deal offered by international creditors, warns one of the world’s largest independent financial advisory organisations.
The warning from Tom Elliott, deVere Group’s International Investment strategist, comes as Alexis Tsipras’ motion for a referendum won support from at least 170 MPs in the 300-strong Greek parliament in the early hours of Sunday.
However, the creditors have rejected the referendum claiming it is now too late.
Mr Elliott comments: “With the ECB announcing yesterday that it will no longer allow the Greek central bank to print euros, and the consequent introduction of capital controls by the Greek government, Greece is undoubtedly moving steadily and unhappily towards the exit door of the euro.
“Greeks are now hoarding euros, starving banks of the currency. This means that the central bank may need to print its own currency in order to ensure pensions and public sector salaries are paid. Initially launched at parity with the euro, it will fall sharply in value due to the reluctance of Greeks to hold it any longer than necessary.
“This is in accordance with Gresham’s law, which predicts that bad money drives out good money, as households use good money as a store of value rather than as a transaction currency.”
How do policy makers put this inching towards a Grexit into reverse?
Mr Elliott explains: “The Greek government has announced a referendum on Sunday 5th July, on whether the country should accept the deal offered last week by euro zone finance ministers at the Eurogroup discussions.
“This is a potential game changer, which the Eurogroup and the IMF should welcome.
“Sadly, they both rejected it on the spurious grounds that it’s too late: the IMF wants repaid EUR 1.5bn by the end of tomorrow, which is the same day that the euro zone second bailout expires, with no agreement in place as to what will replace it.
“But deadlines are imaginary constructs. The IMF and Eurogroup should wait a week and see what result the referendum brings. If a vote to reject the Eurogroup’s final offer comes to pass, then Grexit should be allowed to happen.”
He continues: “A vote to accept the Eurogroup proposals will be a game changer. Syriza would have to call elections, since it could not implement reforms that it has already rejected and will be campaigning against in the referendum.
“A new government that reflects the will of the people could then sign on the dotted line. The risk of Grexit subsides, Greece remains in the euro and the EU and the continent breathes a sigh of relief.
“Austerity will persist for years as the country pays off its massive debt. However, this could be alleviated by the Eurogroup should agreeing to substantial debt relief as and when reforms to labour markets, pensions, tax collection and the breaking up of professional cartels take place.
“What will emerge will be a modern European country.”
Mr Elliott concludes: “The unwillingness of the IMF and the Eurogroup to discuss debt relief is a blind spot that needs to be addressed. Repayment of debt to GDP of around 185 per cent is unrealistic, better to reduce the debt in return for a broader set of reforms than to face default on all the debt and see no reform in a Greece outside the euro.”