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Calm Markets Are Bad News For Greek Negotiators

Greek voters delivered Prime Minister Alexis Tsipras a big victory on Sunday. Financial markets on Monday may be dealing him just as big a loss.

In Sunday’s referendum, Greece overwhelmingly rejected a European bailout package that would have forced the country to accept further tax increases and spending cuts in return for billions of euros in financial support. There are lots of good pieces out there explaining the referendum and what it means, but the barest-bones version is this: Greece needs financial help from Europe to pay its bills, and Tsipras didn’t like the terms European leaders were offering. More than 60 percent of Greek voters agreed with him.

Greek Finance Minister Yanis Varoufakis — who resigned via blog post Monday morning — is an expert in game theory, so it makes sense to look at the referendum through that lens. Varoufakis and Tsipras were hoping the referendum would improve their negotiating position: The vote would prove that they weren’t bluffing when they said Greeks wouldn’t accept Europe’s harsh bailout terms.

That part of Tsipras’s gambit worked: He won the vote. But in doing so, he may have inadvertently exposed how weak Greece’s negotiating position really is. That’s because financial markets on Monday didn’t crash, reacting with what The Wall Street Journal described as “trepidation, not panic.” Stocks fell but didn’t plunge; yields on Spanish, Italian and Portuguese government bonds — considered the most vulnerable to a spreading financial crisis — rose but didn’t skyrocket.

The muted market reaction matters because Greece’s trump card in negotiations has always been, essentially, “Push us too hard and we’ll leave the euro.” That threat carried weight because no one really knows what the consequences of a Greek withdrawal from the euro — a “Grexit,” in financial-world jargon — would be.

Some experts feared “contagion,” a financial crisis that would quickly spread beyond Greece. European leaders argue that they have safeguards in place to keep the crisis contained to Greece. But there is no true historical precedent, so there’s no way to say for sure.

Sunday’s referendum, however, represented one of the clearest tests to date of what would happen to financial markets if Greece left the euro. The Greek vote makes a Grexit much more likely. It also came as a surprise — betting markets, along with many polls, predicted a narrow victory for the “yes” side — meaning that investors hadn’t fully accounted for a “no” vote ahead of time. Yet markets didn’t melt down, bolstering European leaders’ claims that they can prevent a wider crisis.

Of course, things could still change. Investors might just be betting that the two sides will still reach a deal; if negotiations fall apart, markets could still plummet after all. Alternatively, Tsipras’s gambit could still pay off: The vote proved that Greeks are united, perhaps more so than the country’s creditors. European leaders were slated to meet on Monday and might still end up offering a better deal than they did before the referendum.

But at least for now, it looks like markets are calling Tsipras’s bluff.

Ben Casselman is a senior editor and the chief economics writer for FiveThirtyEight.

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