No deal between Greece and its creditors

The country looks set to default on its payment of 1.6 billion euros to the International Monetary Fund

In a surprise move, Greek Prime Minister Alexis Tsipras announced late on Friday night that a referendum would be held next Sunday 5 July on whether the proposals from the creditors (as per Friday 20 hours) should be implemented or not. The Greek parliament has approved the referendum while Alexis Tsipras urged Greek citizens to vote against the proposals.
The unilateral breakdown of negotiations has triggered a stern reaction from the Eurogroup, whereby it has decided not to extend the current bail-out programme, which expires next Tuesday 30 June. As a result Greece will in all probability default on its debt to the International Monetary Fund (IMF), missing a payment of 1.6 billion euros. In a special session on Sunday the European Central Bank (ECB) decided not to raise emergency liquidity to Greek banks, keeping the total amount at an estimated 90 billion euros. As a result, the government has issued a decree to shut down the banks until at least Monday 6 July; while putting a cap on daily withdrawals from automatic teller machines (ATM) and issuing a ban on international transfers.
Critically, the ECB is maintaining the absolute level of emergency financing without applying any “haircut” on collaterals provided by Greek banks.

Will the referendum clarify the situation?
First of all, it is not clear whether the proposals from creditors as per Friday 20 hours are still valid. Let’s assume they are.
Should Greek voters back the proposals via a YES answer, this would at least clarify that a Greek majority support structural reforms to improve competitiveness. However, it is difficult to imagine a Syriza-led government implementing reforms that they fiercely denounce. Either a new coalition in the Greek parliament would have to be found – which looks very unlikely as the pro-euro-zone parties total only 106 (out of 300) seats – new elections would have to be called. The current government has been elected on an anti-austerity programme that is not compatible with debt sustainability, at least in the eyes of its creditors. In addition, its core beliefs regarding public spending and free markets are not conducive to private investments, to say the least, which does not bode well for the outlook of the Greek economy, whether inside or outside the euro zone.

The Greek government has not outlined its plans in case proposals are rejected via a NO answer in the referendum. A default followed by social upheavals might ensue, a continuation of euro membership would look very unlikely, but there is no clear path going forward. A default on IMF repayment does not trigger cross default on other debt securities, a failure to repay the ECB on 20 July (3.5 billion euros) would certainly lead to a re-assessment of emergency financing by the ECB. Eventually the political dimension will prevail, and it is difficult to retain a country within the euro zone with its related rules against the will of its people. Here too, there is no clear path forward as the Maastricht Treaty does not foresee an exit from euro membership.

What will the market impact be?
Volatility will certainly spike up over the next few weeks, though we remain convinced that US macroeconomic data and monetary policy are much more important than Greece for the direction of global markets. The global environment, characterised by improving economic momentum across the top-three developed economies (the US, Japan and the euro zone, G3), reasonably strong corporate earnings and still plentiful global liquidity, remains highly supportive. Crucially we are the opinion that the ECB has built powerful firewalls to mitigate any potential contagion effects from Greece to the periphery, and that the improving macroeconomic data across Spain, Ireland, Portugal and Italy provides a constructive background to contain any potential fallout from the Greek crisis . As a result we maintain our overweight equity on the one hand and significant underweight government bonds on the other hand. We might exploit volatility to add to high-conviction positions on Greece related weakness.

Vontobel Asset Management