Stock markets across the Eurozone opened sharply lower on Monday morning after the people of Greece voted a resounding ‘No’ to an IMF-imposed ‘cash for reform’ deal. France’s CAC40, Frankfurt’s DAX, Paris’s CAC 40 and Madrid’s IBEX 35 all traded down 1.6-2.0% in early trade. London’s FTSE 100, however, largely took the news in its stride, sliding just 1.0%.
With 61.3% of Greek voters ticking the ‘No’ box and just 38.7% opting for ‘Yes’, the Greek people have made their stance very clear in rejecting the terms of an international bailout. Whether the result will lead to Greece leaving the Eurozone is yet to be determined. In principle, a ‘No’ vote means Greece’s creditors will not come back with a new bailout offer. However, it is possible that following this referendum result, both sides agree to sit down again and try to find new terms for a bailout programme. If this scenario emerges, the new deadline becomes July 20th when a EUR 3.5 billion payment to the ECB is due. Greece can't make this payment without financial assistance, and the ECB wouldn't keep Greece in the Euro-system if it's declared insolvent, resulting in Greece being de facto out of the eurozone.
An alternative scenario—and the least likely scenario according to Morningstar senior economist Francisco Torralba—is that the ECB pulls the plug immediately and Grexit becomes a fait accompli.
Exiting the Eurozone would, in theory, mean Greek savers lose most of their savings as the re-denomination into new drachmas sees the value plummet. Foreign investment into Greece would also collapse, unemployment and poverty would rise even higher than they are today, and hyperinflation is possible, says Torralba.
But some studies have shown that dropping the euro would be good for Greece in the long term. “A devaluation would help the country become more competitive; in due time, foreign investment would come back and Greece would regain access to capital markets; and crippling austerity wouldn't be necessary anymore,” Torralba noted in a recent analysis of the situation.
While investors wait ever patiently for the next steps, and with Germany’s Merkel and France’s Hollande calling a Eurozone leaders’ summit to take place today, economists across London are debating whether Greece will indeed leave the euro or whether a new deal can be found.
“With Iberian elections later in the year and Irish/Cypriot eyes watching keenly for precedents, debt relief is simply not palatable,” says Panmure Gordon chief economist Simon French. “We have a Grexit at 100% – yesterday’s events simply bring this date closer.”
“I would not be surprised to see emergency funding pulled for Greek banks in the coming days, which would ultimately make this the final nail in the coffin for the Greek banking sector, and could send Athenian share prices into a fatal nose dive,” says Kathleen Brooks of Forex.com. “Overall, those who thought the chances of Grexit were at 60% last week, must now be revising them up to 80%.”
Writing ahead of the referendum result, Danae Kyriakopoulou, senior economist at the Centre for Economics and Business Research, said: “Both Grexit and Euro-continuation are options currently offered to Greece in their worst possible guise. Bearing this in mind, Grexit remains the worse of the two options. The best case scenario would be one where creditors reconsider the costs and benefits of their stance and present a more pro-growth plan that includes some debt relief.”
“Either Greece takes it on the chin and accepts conditional assistance, hoping for a lifeline in the form of some debt restructuring/forgiveness, or it goes it alone and takes everyone into uncharted waters in terms of abandoning the euro club and needing to start over,” notes Mike van Dulken, Head of Research at Accendo Markets. “This story has at least another chapter to go. Expect more of the unexpected.”
