Download Opening Pandora`s box

Opening Pandora’s box
The result of the historic referendum held in Greece yesterday
shows a strong win for the No vote (60%+). In this piece,
we offer our updated thoughts on the current situation.
Significance of the strong “no” vote
The size of the “no” vote has added a new dimension to the situation as it potentially
strengthens Tsipras stance (now backed by an overwhelming majority of Greeks) in his negotiations with the creditors.
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.
Ball in eurozone's court
All in all, as we have discussed in previous pieces, Greek debt issue is pertinent for risky assets especially from
a political perspective rather than from a financial linkages angle. At the top level, EU will now have to decide if
allowing Greece to lurch out of the European project makes sense, given the strong question mark such a development
can raise on the irreversibility of the union. After all, let us not forget that Greece makes-up less than 2% of eurozone
GDP and has an economy, which is smaller than the size of Milan.
In the days ahead, it will be critical to see if the EU still stands-by its pre-referendum stance, especially as the IMF
and the US both have already weighed in with a need to look into debt relief for Greece, given unsustainability of
Greece’s debt profile (although, IMF did note that the Greek government's stance has made the situation worse).
Short-term implications – Negative for risk/waiting for the ECB
The short-term implications for risky assets are clearly negative as the markets went into the weekend pricing in a
much higher probability of a Yes outcome. We expect Euro/$ to come under pressure and periphery debt (and by
extension credit) to see significant widening pressure today. However, we are likely to see headlines dominate
price-action.
That said, as we discussed in our 29 June piece, this is not 2011/12 as the backstops available now are far
stronger than 3 years ago. Indeed, if the pressure escalates in coming days, we expect ECB to spring into action
with both communication and action. Whether it will be enough to stem the route will depend on the "bazooka",
the ECB manages to unveil.
Key events to watch
First of all the key event to watch would be the ECB's decision on the ELA, which will decide if Greece would go
towards the IOU route in coming days. Secondly, the 20th July payment to the ECB is also very significant as nonpayment will confirm Greece's default. In addition, EU's revised stance (if any) would have huge implications on the
situation. All in all, we expect uncertainty to remain high, given the lack of clarity and additional rounds of negotiation.
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Beyond the next few days, the sharp fall in economic activity in Greece is sure to have severe social implications
and it remains to be seen if the Syriza government would survive the sharp economic pain that lies ahead. We don’t
have a Grexit yet but we are certainly on the road to it and issuance of IOUs will take us into what has been so far
the unthinkable event horizon (or entrance of a black hole). That said, this morning’s news flow that Finance minister
Varoufakis has resigned (despite a very strong No victory) shows that there are still many twists and turns left
in this story.
Salman Ahmed
Global Strategist
Lombard Odier Investment Managers
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