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Posted on July 3, 2015

Yes or No? The Greek Referendum – what will the outcome mean?

A big Thank You to the team at Ord Minnett for the following analysis on what a Yes or No vote will mean in the Greek Referendum on Sunday …
We draw on work from our global counterpart to understand what a “yes” or “no” in Sunday’s referendum could produce. Either way, the path for Greece has become even trickier. It almost goes without saying that investors should not expect a quick fix to the situation, although a “yes” vote is likely to provide some relief for markets in the near term.
Firstly, it now appears inevitable that the Greek referendum on “the proposals from the institutions” will go ahead on Sunday. Under the scenario of the “yes” vote succeeding, outcomes are ultimately likely to prove stabilising but could be volatile in the meantime. Key uncertainties relate to who will govern Greece and what will be negotiated in the aftermath of the second bail-out program’s expiration.
Under a “no” vote, positions on both sides are likely to harden and the situation worsen rapidly. This raises risks of more extreme political and economic outcomes, including of course, a Greek exit from European monetary union.
Yes, with a complicated path towards stability (60% probability)

  • Given the greater probability based on polls, this represents a base case scenario. A “yes” vote likely means that PM Tsipras stands down and a national unity government is formed under technocratic leadership. (Readers will recall Greece operated under a technocratic government led by former ECB member Lucas Papademus in late 2011 and early 2012, which added stability for a time). Such a government would have a mandate to secure a deal with the Eurogroup and begin to implement it. Although the terms offered previously are simply not on the table any more, not least because Greek circumstances have changed.
  • A unity government engaged in constructive negotiations would imply an ECB which keeps rolling emergency liquidity and works cooperatively with the Bank of Greece to ensure that the country’s payments system still functions. However, the difficult issue of how the banking system will be gradually returned to full function would also have to be addressed. This is amid little willingness on the creditors’ side to allow large increases in liquidity or to provide funds for banking recapitalisation. Any return toward full function will take time.
  • This scenario will likely produce expectations that elections will follow by early 2016 at the latest.
  • Although Tsipras has made remarks that he will stand down if the vote is “yes”, he is clearly not bound by them. This represents a second scenario, in which he attempts to continue as PM and returns to negotiations. But there has been a complete breakdown of trust and process. As a result, the terms of any subsequent agreement are likely to be extremely detailed and embody an onerous oversight regime. Negotiations over a program will therefore be protracted. It is also worth noting that the demand for debt restructuring from Greece “up-front” has not been dropped. With Tsipiras still in power, the ECB will likely continue to roll emergency liquidity support, but the support for banks would be limited and the negative effects created by capital controls will still exist. It is easy to imagine the ECB setting a deadline beyond which emergency liquidity would cease, effectively forcing Greek authorities to conclude a deal by a certain date or face the permanent closure of the Greek banks as euro-denominated institutions.
  • A third alternative is for Mr Tsipras to call a snap election after a “yes” vote. Such a process would normally take a minimum of three weeks. But given the rapidity with which the referendum has been called, there may be means to expedite this. This would put the rest of the region in the difficult position of having no one to negotiate with who has the authority to make commitments that will bind the incoming administration. It is also unclear exactly how the platform of the major parties would evolve in a new election campaign. Could Syriza (or at least part of it) shift to campaign on the basis of Euro-exit? And how does the rest of the region try to keep some minimal functionality in the Greek economy? A new elections scenario is inherently unpredictable and possibly chaotic.

No, with a slide towards more extreme stress (40% probability)

  • Although PM Tsipras has argued otherwise, many in the rest of the region see the referendum as a means for Greece to decide about Euro participation. In the wake of a “no” vote, there is likely to be a split within the rest of Europe as to how to approach the situation. The European Commission and France (and possibly others) will argue that negotiations should continue with the aim of finding agreement. Others will return to negotiations with their positions hardened against a newly emboldened Tsipras.
  • The “no” vote would put the ECB in a very difficult position. On the one hand, the absence of agreement on a program will lead some to argue that emergency liquidity should halt. This would lead to the bankruptcy of Greek banks while minimal functionality of the payments system in euros would be extremely difficult to sustain. Greece would have little option but to announce a redenomination into a newly launched currency and to nationalise its banks in this scenario. Of course, redenomination brings with it the spectre of hyper-inflation for imported good & services.
  • Even if the ECB chooses to continue emergency liquidity, the limits on the current measures will tighten through time as deposits are withdrawn. Moreover, if the “no” vote creates doubt that the banks will ever reopen, credit cards and electronic transactions will no longer be acceptable as a means of payment in many instances within Greece (even if the Greek state tries to legislate otherwise). Businesses will stop transacting goods & services in return for a bank balance that cannot be turned into cash, and is likely to be redenominated.
  • Combine this with the potential interruptions to the logistics of food, energy and medicine supply created by capital controls, and it is possible to concoct very worrying scenarios indeed. We can imagine the ECB being forced to consider small increments to emergency liquidity simply to retain some value in the claims on bank deposits as a means of exchange, and hence to keep electronic transactions between agents operating within Greece functioning. The balance between that and the ECB’s statutory obligation to lend only to solvent institutions will be extremely difficult (and perhaps impossible) to find.
  • A best guess is that a “no” vote would require a political intervention that hasn’t yet been forthcoming in order to bring Greece back from euro exit. And the dynamics of worsening banking and payments dysfunction would shorten the timescale for such an intervention to a handful of weeks at most.

All eyes on Sunday.

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