On Sunday July 5th, Greece’s referendum went in favor of Prime Minister Alexis Tsipras, prolonging market uncertainty and stoking fears of an economic collapse in the Mediterranean region.
With most ballots counted, 61% of the country overwhelmingly voted against an austerity program from the European Union and the International Monetary Fund (IMF), backing their government’s hard line negotiating strategy.
Markets were down early morning on Monday July 6th. Milan’s FTSE MIB Index was 2.9% lower and Madrid’s IBEX 35 shed 2.1% as investors worry about contagion spreading to Italy and Spain. (Source: The Wall Street Journal, July 6, 2015.)
Germany’s DAX dropped 1.5% and France’s CAC 40 fell 1.7%. The losses were muted compared to recent pullbacks in European equities, possibly because Greece’s bombastic finance minister resigned after the referendum. (Source: The Wall Street Journal, July 6, 2015.)
Yanis Varoufakis was a well-known economist before becoming finance minister for the newly-elected Greek government. His criticism of austerity policies put him at odds with other finance ministers in Europe, leading to a breakdown in negotiations. The friction was made worse by his colorful rhetoric and adversarial debate style.
With talks set to resume on Tuesday, some leaders requested that Varoufakis be excluded from the meetings. Despite being a staunch ally of Varoufakis, Tsipras conceded that keeping him out of the negotiations could help solidify a deal.
“I consider it my duty to help Alexis Tsipras exploit, as he sees fit, the capital that the Greek people granted us through yesterday’s referendum,” wrote Varoufakis. “I shall wear the creditors’ loathing with pride.”
While the absence of Varoufakis will appease EU negotiators, there is no consensus on how to bridge the divide. Both sides remain entrenched in their positions, meaning that a Greek exit from the eurozone may be imminent.
In the event of a departure from the eurozone, Greece would likely revert to the drachma—the original Greek currency. The country’s purchasing power would deteriorate significantly and investor confidence could crater. As a result, economic strife in the surrounding region could intensify significantly if the country does not resolve its funding crisis.