Greece says NO. Now what?

Greece (MNN) — Greece may have tried to posture its way out of trouble with the European Union, but when the chips were down, the EU called its bluff. Now what?

Greece failed to make its 1.5 billion euro payment to the International Monetary Fund (IMF) at the end of June, making it the first developed economy to go into default. That was merely a drop in the bucket compared to the 3.5 billion euro payment due in late July. But will economic calamity hit Europe should Greece withdraw?

Tasos Ioannidis with AMG International says there’s some confusion on the part of the Greeks as to what they were agreeing to and voting on. “The Europeans said that it was a vote on whether the Greeks wanted to stay in the Eurozone or not. The Greek people chose to interpret it as the government was telling them this was a vote on whether they wanted to accept the (IMF) terms or not.”

Ioannidis wonders, “If the point was to accept the last offer made to them, what was the point of the referendum?” The NO vote seemed to be a flat rejection of the bailout terms and approval for leaving the Eurozone. However, “At the same time, the people were asked in exit polls whether they want to stay in the Eurozone or not. More than 75% say they want to stay in the Eurozone regardless of what agreement there is, yet at the same time, they say they don’t like the agreement that was offered to them.”

Ioannidis goes on to explain, “For the Greeks, it was either a choice of believing their leader or believing the Europeans. And they chose to believe their leader.”

The country has been in recession for five years. Its economy has shrunk by 25%. Unemployment is at 27.6%, with the unemployment rates for youth at 49.7%. In advance of Sunday’s referendum and a looming default, throughout Greece banks closed in order to quell an expected run. The financial hardships people have suffered since 2009 have been blamed on austerity measures included with the bailout loans that kept the country solvent.

Now that Greece is in default, the IMF aid package has been withdrawn. Despite last-ditch efforts being made to salvage the situation, “The terms that Greece has to accept at this point are much harsher”‘ says Ioannidis. He adds, “It is unknown what is going to happen, although the chances of a Greek exit from the Euro are much, much higher right now than they have ever been.”

There’s talk that either Russia or China could be waiting in the wings with a bailout. Russia would gain an enormous foothold in Europe if it was able to place bases or troops in Greece. However, Greece’s second bluff appears to have been called. “Russia has indicated very clearly for the Greeks not to expect anything from them. China has not said anything. The value of Greece for China is as part of the Eurozone.” In fact, Ioannidis says, “The Chinese and the Russians, yesterday and today, say it’s very important that Greece comes to terms with its creditors.”

Greece’s finance minister resigned, signaling a possible cabinet shake-up.   Watchdogs think it’s the first step toward putting a more centrist negotiating team in place to deal with creditors.  On Monday, Greece’s top negotiator in aid talks with creditors, Euclid Tsakalotos, was selected to replace Yanis Varoufakis, the former finance minister.

That begs the obvious question: what proposal could any new Greek team bring to the table other than what is already offered? “They are hoping that any agreement will have less in taxes; yet at the same time, the government does not want to reduce the public sector. You can’t have it both ways. There is no way. Something has to give.”

Shortly after we spoke with Ioannidis, he sent a message regarding the outcome of Monday’s meetings with the Greek cabinet. German Chancellor Angela Merkel and French president Francois Hollande wanted Greek party leaders to sign a common statement affirming the desire to stay in the Eurozone and that they will support terms of the bailout agreement.

According to Ioannidis, four of the six parties signed the terms. Those who refused to sign included Golden Dawn (neo Nazi party) and the Communist Party of Greece.

With all the machinations of the last 72 hours, it seems like something is happening, but in uncharted territory, it’s hard to know exactly what the outcome will be. “The Greek banks are not going to be open for a while longer. When there is no agreement, it is extremely unlikely that the banks will be able to open. From news reports, the big banks, even those with capital controls, only have liquidity until the end of the week,” says Ioannidis. The longer the banks stay closed, the more magnified the problems become on the ground for the average citizen.

For ministries, the issue becomes crucial. (See Story 2 for a continuation of impact on ministries)