Greece voting ‘no’ to further austerity has strengthened its negotiating power with Europe, but increased the likelihood of Grexit unless its creditors reassess their stance, according to industry figures.
On Sunday the majority the Greek population voted against a package of austerity measures proposed by its European creditors. In a special referendum, 61% rejected further austerity while 39% were in favour.
Despite the strong national rejection of a bailout, Greek finance minister Yanis Varoufakis resigned, claiming his continued presence was not welcome by creditors and saying he would “wear the creditors’ loathing with pride”.
Greece has already defaulted on €1.5bn due to be repaid on 30 June to the International Monetary Fund and is facing a bigger debt of €3.4bn, due to the European Central Bank (ECB) on 20 July.
Greek banks, which have relied on ECB funding via its Emergency Liquidity Assistance programme, are remaining shut until further notice.
Lombard Odier Investment Managers global strategist and portfolio manager Salman Ahmed said the size of the no vote added a “new dimension” to the situation as it potentially strengthened Greek prime minister Alexis Tsipras’ stance in negotiations with creditors.
However, he added: “Unless, the creditors acknowledge this development as a shift in underlying realities forcing them to reassess their stance, it increases the likelihood of a Grexit significantly.
“Without a deal, it is hard to see how the Greek banking sector will open for business, which significantly increases the probability of Greece issuing its own IOUs (scrip or parallel currency) in a bid to open its economy for business. Indeed issuing of IOUs will clearly be a precursor to an eventual Grexit down the road. However, before the IOU route, there are other options available as well (such as a haircut on deposits), which can give more time to the two parties.”
JP Morgan Asset Management chief market strategist for Europe Stephanie Flanders agreed the no vote had strengthened Syriza’s domestic political standing, but made negotiations with the country’s European creditors over a new support package a lot more difficult.
She added: “There are plenty of potential scenarios from here, not all of which include a Greek exit from the euro. But the one-in-four – or one-in-three – chance we have ascribed to that outcome in previous notes was based on an expectation that Greeks were likely to vote ‘yes’. With this ‘no’ vote we have moved firmly onto the Grexit side of the decision tree, with a messy Greek exit now more likely than not.
“We can expect this to cause volatility and sell-offs in European markets and potentially very serious long-term political implications for Europe. However, assuming that policymakers respond reasonably decisively to signs of contagion, we do not currently believe the result poses a broader risk to European investors or the European recovery.”
Royal London Asset Management head of mutli-asset Trevor Greethan, said in the shorter term it is hard to see developments in a country making up about 1% of European Union GDP and one-tenth of a percent of its stock market capitalisation having a lasting impact on world markets.
“In fact, with investor sentiment towards the depressed end of the range, Greek stress may be creating a short-term buying opportunity for global stocks,” he said. “The fundamentals are positive. Monetary policy globally is still very loose and the drop in energy prices over the last year should underpin a continued expansion in the world economy.”
Robeco chief economist Léon Cornelissen described the situation as “pretty desperate” for the Greeks.
He said: “The vote won’t change the position of the creditors, so it is Greece which must turn. And that’s unlikely given the strength of the ‘No’ vote. Still, a last-minute deal still cannot be completely ruled out because we are very close to the introduction of a parallel currency.
“The reopening of banks would necessitate a severe haircut on deposits, or the introduction of the parallel currency. There are no Russian oligarchs around to finance their recapitalization,” said Cornelissen. “So the situation is pretty desperate for Greeks.”
Earlier today European equities fell about 1% while the euro fell slightly against major currencies and bond spreads of peripheral eurozone countries widened against the benchmark German government bund.
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