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Jul 5, 2015 | 20:29 GMT

What 'No' Means After Greece's Referendum

(LOUISA GOULIAMAKI/AFP/Getty Images)

The Greeks have voted no. After a week of speculation, rumors, threats, and pro- and anti-agreement demonstrations, early results show that 61 percent of the Greeks voted against the terms that the country's creditors requested in exchange for additional funding. It is a victory for the ruling Syriza party, which campaigned for the no vote, but one that will probably come at a high price for Greece. While Prime Minister Alexis Tsipras said he would return to the negotiation table to reach an agreement with the creditors, most governments in the eurozone have said they would not offer better conditions for Athens. More important, the referendum's result will create even more uncertainty about the future of the country's banking sector.

First, Athens will immediately ask the European Central Bank for additional liquidity for Greek banks. Greek banks have been dependent on emergency liquidity from the ECB since the beginning of the year. The emergency liquidity depends on the ECB's assessment of the Greek banking system, since the Frankfurt-based institution is only allowed to lend money to solvent banks. Tsipras announced the introduction of capital controls on June 28, promising the measure would be short-lived. But the current political and financial uncertainty makes it unlikely that Athens will lift capital controls any time soon.

Greek banks are simply running out of money, and they cannot survive without external support from the ECB. Should the ECB refuse to give Greek banks the money they need, Greece will have two options. The first option involves seizing a part of the deposits to shore up the banks, known as a bail-in, which has a direct precedent in the Cypriot crisis of 2013. The second option is even more drastic: returning to the drachma to recapitalize banks by printing money.

Second, the Greek government will probably start making phone calls to Berlin, Paris and Brussels to resume negotiations. It will not be an easy task. Athens is demanding debt relief — a hard concession for the creditors to accept. The International Monetary Fund has repeatedly suggested another write-down of Greek debt, but most eurozone countries resist the idea. Debt forgiveness is unpopular in Northern European countries such as Germany and Finland, while some governments in Southern Europe, notably Spain and Portugal, reject making concessions to Greece's left wing government only months before their national elections. Portugal will hold elections in October, Spain in November or December, and the conservative governments in Lisbon and Madrid are worried that making concessions to Greece's left-wing government would strengthen the left-wing opposition in their countries.

Third, Tsipras will have to deal with an extremely complex political and social situation at home. The victory of the no camp will strengthen the most radical members of Syriza and weaken the moderates, constraining Tsipras' ability to negotiate with the creditors. And while the no crowd won the vote, a substantial number of Greeks fear the result of the referendum will put the country closer to leaving the eurozone, potentially costing many Greeks their savings. So far, the Greeks are calm, but a collapse of the country's banking sector and an exit from the currency union would almost certainly trigger street protests that could force the government to resign.

Consequently, Greece's creditors will not make any immediate concessions to Athens. Berlin and others could instead wait to see whether Greece's deepening banking crisis erodes domestic support for Tsipras. Greece's strategy, meanwhile, will be to generate divisions among the creditors, such as Italy and France, which may fear the spread of uncertainty in their financial markets and push for an agreement.

And finally, the Greek referendum will indeed test the health of European financial markets. For the past three years, countries in Southern Europe were able to borrow at low costs because of the promise of ECB intervention. Starting July 5, this promise will be tested. Ironically, the Greek crisis could also lead to a weaker and cheaper, euro, which would make eurozone exports more competitive.

Five years into the crisis, Greek voters have opposed the continuation of austerity measures. With the referendum, Greece is moving beyond negotiation to a true test of nerve as Athens directly confronts its lenders. Tsipras and his team will reach out to the creditors as early as tonight. However, the creditors are unlikely to make fast and comprehensive concessions to Athens, fearing that the Greek referendum will create a precedent for other eurozone members (Athens achieved what seemed impossible: both Spain's left-wing Podemos and France's right-wing National Front praised the result). In the meantime, both Syriza's hold on power and Greece's membership in the eurozone will be extremely fragile.

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