After Brexit, only uncertainty is certain

As a world leader in holding elections and referendums, perhaps this is the time for Greece to step forward and offer advice on how to deal with the jarring result from Thursday’s Brexit vote. After all, the serving prime minister in Athens has experience of how to turn a referendum result on its head. Barring input from Alexis Tsipras on how the UK could stay in the European Union after 52 percent of voters opted to leave, Greece, like the rest of Europe, now has to deal with the consequences of this choice.

The first certainty is we are now looking at a lengthy period of uncertainty within the EU. It could take several years to negotiate Britain’s exit and, following Prime Minister David Cameron’s decision on Friday to not immediately activate the procedures under Article 50 of the Lisbon Treaty, no meaningful discussion is going to take place until a new British premier has been installed in October.

European Council President Donald Tusk, European Commission chief Jean-Claude Juncker, European Parliament head Martin Schulz and Dutch Prime Minister Mark Rutte issued a joint statement on Friday saying they expect London to begin the procedure as soon as possible. “Any delay would unnecessarily prolong uncertainty,” they said. But the Brexit camp is in no hurry to put Article 50 into practice as it believes this would weaken their negotiating position.

This means that the turmoil witnessed on Friday, when the value of sterling plunged, central banks pledged extra liquidity and stock markets plummeted may be with us (albeit not to such dramatic effect) for some time to come.

Debilitated by years of recession and fiscal adjustment, Greece’s economy is in a particularly vulnerable position. Its vulnerability to shocks was underlined on Friday, when the Athens Stock Exchange was the worst performing bourse in the world as the general index fell 13.4 percent, with bank stocks suffering particularly.

However, it is in the real economy that Greece could see the most profound hit. With the pound dropping like a stone it is no longer clear that Greece can expect a repeat of last year, when 2.4 million Britons visited the country, spending an average of 842 euros on each trip. It should be noted that although visitors from the UK accounted for just over 9 percent of arrivals, the receipts from their trips made up 14.3 percent, meaning they were above average spenders who will be sorely missed if they do not make the trip this year.

As we mentioned last week, the International Monetary Fund sees the economic impact from Brexit on Greece being less than 0.5 percent of gross domestic product.

While other eurozone economies might be able to absorb this, for Greece this is a significant figure. It could be the difference, for instance, between reaching this year’s target for a 0.3 percent of GDP primary surplus and missing it to such an extent that the automatic mechanism for further fiscal interventions will be triggered, which could then carry a number of political complications with it.

Bank of Greece sources told local media that they expect the impact on tourism and markets to be limited. The European Central Bank also stepped in to offer reassurance to all eurozone members, saying it had a plan in place and that it is ready to provide additional liquidity if needed.

In this respect, the ECB governing council’s decision on Thursday to reinstate the waiver on Greek government securities so local lenders could use them as collateral for cheap borrowing is somewhat of a blessing. The decision, which will apply from this Wednesday, means that Greek banks can tap from the ECB up to some 6 billion euros via the regular, rather than more expensive emergency liquidity assistance (ELA), procedure. This would save up to 90 million euros in interest.

The ECB also confirmed Greek lenders will be able to take part in its targeted longer-term refinancing operations (TLTRO-II), which begin this month. The banks could lower their outlay on interest by another 130 million euros if they participate.  

Although BoG sources pointed out that the capital controls which remain in place mean there should not be any problems at Greek banks, the return of the waiver adds an extra layer of security. Another boost would come from Greece being deemed eligible for quantitative easing. The ECB said on Thursday that this would be examined at a later stage this year, linking it to the discussions on Greek sustainability. If Athens gets the green light, the ECB could buy up to 4.2 billion euros of Greek government bonds from next month, providing something of a buffer in this tricky period.

The key question for Greece, though, will be how the eurozone reacts to the disquiet caused by the UK result. Opinion is divided between those who feel decision makers will seize on the opportunity provided by British voters and push for deeper integration between the single currency’s member-states, and those who believe that the separatist tendencies in the EU (the Brexit result has already sparked demands for referendums in other countries) will prompt politicians to be much more cautious.

Frederik Ducrozet, a senior economist at Pictet Wealth Management, suggests that the eurozone decision-makers are prepared to act decisively.

“If it proves necessary, we would not rule out another ‘whatever it takes’ moment to preserve the euro area’s integrity,” he wrote on Friday of the ECB, whose next policy meeting is on July 21.

“To begin with, the ECB could make full use of the flexibility of existing tools, including: 1) Stronger forward guidance; 2) QE extension beyond March 2017 as well as a temporary front-loading of asset purchases; 3) More favorable TLTRO conditions, especially after today’s weaker-than-expected net demand at the first TLTRO-II operation (around 30 billion euros).”

However, the central bank using the tools at its disposal to shore up the eurozone’s defenses is different from the key players in the single currency deciding, for good, that we are all in this together.

“Many people reject this nanny-state Europe with its bureaucracy and arrogance and that is why further integration cannot be the answer to this crisis, even if some politicians want just that,” wrote Sven Afhuppe, the editor in chief of German daily Handelsblatt, on Friday.

“Anyone advocating this has not understood that Europe is stuck with a serious crisis of identity. There cannot be any further steps toward integration without a persuasive, uniting idea.”

It seems that for the time being, Greece can do little but wait and hope. There will undoubtedly be a period of uncertainty until Europe decides how to respond to this political, economic and existential shock. The only bright spot is that over the last few years Greece has grown as used to dealing with uncertainty as it has to the fallout from elections and referendums.