Greece: Sunday’s referendum and the markets

The outcome of Sunday’s Greek referendum is uncertain. Regardless of the outcome, Greece will continue to face substantial economic dislocation in the shorter term. But, equally, our base case is that Greece will ultimately remain in the Euro area even in the event of a ‘No’ vote

Referendum’s impact on Greek politics is crucial
Rather than the outcome of the referendum per se, what matters for wider market developments is the impact of that outcome on the pace and nature of domestic political change within Greece. A ‘Yes’ vote, an immediate change of government and a rapid rapprochement with creditors would be market friendly. By contrast, a ‘No’ vote and slow political realignment would weigh on markets, even if the ECB stands ready to contain any substantial contagion across the periphery by stepping up sovereign purchases.

Impact on bond markets
In the event of negative surprises, bond spreads could widen out to 200-250bp, with 10-year BTPs yielding around 3%. From these levels and upwards, we would view the probability of an ECB intervention increasing.
In the event of a ‘Yes’ vote, and a subsequent accommodation, we would look for BTP/Bonos to go back down to 120bp and 100bp (or 30-50bp tighter from current levels): investors would likely anticipate political change, followed by fiscal and structural adjustments and a further reprofiling of public debt. However, these would take time to materialise, and the price action could remain volatile.

Impact on equity markets
Based on the impact of sovereign spreads and equity risk premia, our best estimate for the worst-case downside in the equity market in Europe on a ‘No’ vote is a move to around 3150 on Eurostoxx 50 (around 10%), although we think this would be short-lived as ECB intervention would kick in, prompting investors to focus on improving fundamentals; we would see any meaningful correction as a buying opportunity, particularly for MIB, IBEX and DAX for investors taking a medium-term view. A ‘Yes’ vote followed by an accommodation between the Greek authorities and the institutions would likely see equities up around 10%, back to April highs of around 3830.

Huw Pill, Francesco Garzarelli, Peter Oppenheimer – Goldman Sachs