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Greece’s No vote makes it much harder to cut a Euro deal

Greek Prime Minister Alexis Tsipras speaks at parliament in AthensGreek Prime Minister Alexis Tsipras speaks at parliament in Athens
Greek Prime Minister Alexis TsiprasPhotograph by Ayhan Mehmet — Anadolu Agency/Getty Images

Greek Prime Minister Alexis Tsipras exhorted his citizens to vote “no” in a referendum on Sunday to strengthen his nation’s hand in negotiations with its creditors. Now that they have followed his lead and overwhelmingly rejected the lenders’ demands for reform, Tsipras is triumphantly pledging to clinch a deal in 48 hours.

In truth, Tsipras victory in the historic referendum makes it far more difficult to break the impasse with Greece’s trio of creditors, the IMF, ECB, and European Commission. Just days before the vote, Tsipras caved on almost every single “austerity” measure on the creditors’ wish list. In calling the referendum, Tsipras was really asking Greece’s citizens to spurn the very reforms he’d just agreed to. Now he’ll return to the table with a mandate to refuse the program he was ready to embrace. No wonder the creditors are confused. Germany’s foreign minister denounced the Greek strategy as totally confusing and impossible to “decode.”

“Tsipras wanted a mandate to bargain from a powerful position, but that was never in doubt,” says Hari Tsoukas of Britain’s Warwick Business School. “He was close to a deal, and then invited people to vote no on that deal. That’s why the creditors were put off, and why they’re hardening their stance.”

To restart talks, Tsipras will need to revive his final proposal to his creditors, a blueprint that bows to precisely the kind of austerity his citizens now shun. On June 30, hours before the deadline for an agreement and a big payment to the IMF, Tsipras made a dramatic appeal in a conference call with the Eurozone’s finance ministers. He agreed to almost all the lenders’ conditions. The exceptions were relatively minor, chiefly a request to maintain special, low sales tax rates for the Greek islands that promote tourism.

On the thorny issue of pensions, Athens was willing to raise the retirement age and reduce payouts, as the creditors demanded. The differences were a matter of timing: Rather than act immediately, Tsipras sought to phase in pension reforms over the next two years. “He was pretty close,” says Tsoukas. “He’d agreed on 90% of the lenders’ conditions.”

But Tsipras wanted something in return: a major debt restructuring plan, backed by a big cash infusion. He requested 29 billion euros in additional bailout money, an injection that would fund the government for the next two years. He also asked that the payback periods be extended to 60 or 70 years, and that interest rates on Greece’s borrowings be sharply reduced.

The ministers declined to discuss the plan, even though it delivered most of the reforms they wanted. Instead, Angela Merkel of Germany, along with other heads of state, demanded that Greece cancel its referendum as a condition for considering the Tsipras platform. Now, the lenders say they will not resume talks until Tsipras takes the initiative and presents a new plan.

Any realistic proposal would contain all the concessions Greece made in the June 30 program. But given his anti-austerity mandate, Tsipras is also likely to resume, and perhaps harden, his demands for debt relief. That stance may very well freeze any new talks.

The creditors want to see if Greece enacts the reforms it’s requiring, and that Tsipras has mostly agreed to, before providing more cash and effectively writing down the nation’s debt. They have good reason to be wary. Tsipras has already reneged on conditions imposed in exchange for previous packages, notably by rehiring government workers. “The creditors do not trust the government to do what it promised,” says Tsoukas.

The trust deficit makes it highly unlikely that the lenders will accept a repeat of the June 30 appeal. Still, talks can continue, and perhaps a deal may be reached, as long as Greece’s banks reopen. As this story goes to press on July 6, the ECB board is meeting to decide whether to extend additional emergency funding to the Greek banks and effectively keep Greece in business. Since the bailout has expired, the ECB lacks the authority to provide more funds. That doesn’t mean it won’t happen. On July 7, the finance ministers will debate whether their nations should guarantee the ECB’s 90 billion euros in emergency funding to Greek banks. If a guarantee is forthcoming, the banks can reopen.

But if the ministers decline, Greece’s banks will remain closed, wreaking havoc on the economy. The sole solution will be for Tsipras to drop his demands for debt restructuring and swallow the austerity program. Instead of getting more, he’d need to issue a complete capitulation. It’s not what the Greeks voted for on Sunday, but it may be the only way their nation remains a member in the currency club that most Greeks, and their leader, claim to prize.