Greece has voted ‘No’ in the weekend’s referendum. Whether you look at this as the beginning of the end for the European single currency project or a glorious two fingers to its creditors is by the bye. The next steps for Greece are crucial but both sides will be willing to play hard ball. The Greeks are emboldened by the 61% of the votes that went for the ‘No’ camp, creditors will not give up that easily for fear of creating a precedent.
ECB reaction is crucial
While Angela Merkel and Francois Hollande are meeting today in Paris ahead of a wider European leader’s summit tomorrow, the most important reaction will come from the European Central Bank. It is the ECB and the ECB alone that is propping up the Greek banking system and they are unlikely to extend further liquidity in the aftermath of the vote. A decision must be made by July 20th, however, as that is when Greece is set to repay a EUR3.5bn bond to the central bank.
If they miss that, then we could see the ECB pull its support for the banking system and Greece pitched into a situation where euros and Greek government backed IOUs are used as currency. This morning’s resignation by Greek Finance Minister Varoufakis neatly buries the Syriza government’s pledges that banks would be open within 24 hours of the referendum. A wider piece on the impacts and next steps for Greece will be available on our blog later today.
Markets sell euros for now
The market reaction has been relatively muted through the Asian session. The euro is naturally lower but only by around 50-60bps, with haven European bonds – those of Germany and France – being bought with Italian, Spanish and Portuguese debts being sold. European stock markets are not open at the time of writing but are signalling a 1-2% decline when they begin trading.
The other shoe is yet to drop on this decision, however. It is not glib to say that headline risk remains negative for the euro and other risky assets moving forward; analysts are crawling over each other to increase their odds of a Greek exit from the Eurozone.
Central banks waiting in the wings
We must also focus on the central bank response. The three most important words in Europe remain “whatever it takes” – the phrase the European Central Bank has used again and again to show its level of support for the European financial system. That phrase may be called upon again and again in the coming days and weeks. Contagion is yet to be seen outside of Greece but you have to believe that a reaction from the world’s central banks isn’t too far away.
What now?
We are through the looking glass now on Greece and the negotiations will now focus on the creditors. The IMF seems willing to give debt relief but is on its own in that regard. France wants a deal a lot more than most, and Spain is weighing up its own response given the strength of the Podemos party ahead of its own general election in a few months’ time.
