Greece referendum: Grexit risks ahead – ING

FXStreet (Barcelona) – The Research Team at ING previews the possible answers to the Greece referendum and whether Grexit will be the outcome.

Key Quotes

“The days leading to the Greek referendum should therefore be dominated by uncertainty and possibly financial market turbulences – at least in Greece. It does not look as if peripheral spreads will widen significantly, given that financial markets will probably regard the entire crisis as a Greek crisis and contagion should be limited.”

“If we are wrong and financial markets go crazy, the Eurozone has sufficient instruments to fight contagion. In our view, the ECB’s OMT programme might only be a remote option. The more efficient tool to fight shortterm volatility would be QE. It would also help the ECB to solve its front-loading problem.”

“With volatility but no chaos in the rest of the Eurozone in the coming days is our base case scenario, the other question is what will happen on (or better: after) Sunday. It is impossible for us to forecast the outcome of the referendum, but we can at least sense the domestic political strategy behind the latest twist in the Greek drama.”

“As the creditors’ proposals cross a number of “red lines” of the Greek government, Tsipras is risking a break-up of the government or his own party. A YES vote would give him the authority to clinch a deal with the creditors without losing face because of broken electoral promises. In this case we would probably see the five-month extension of the current programme, during which a total of €15.5bn of financial support would be provided. This would allow the Greek government to implement the structural reforms, which could then lead to a third programme and some limited form of debt restructuring.”

“This still looks a feasible scenario as in a poll on Saturday, published in the To Vima newspaper, 57.5% of Greeks said the government should close a deal with the creditors, while two-thirds want Greece to remain in the Eurozone. However, this scenario basically means that the Greek problems will continue to haunt the Eurozone economy for some time to come.”

“With a Greek government that has not been very co-operative until now and doesn’t seem to have the will to implement market-oriented reforms, one can already anticipate a new stand-off when the extension of the programme would end in November.”

“A defiant Greek government is actually recommending the Greek population to vote NO. If this were to be the outcome, then we would be back to square one: the Greek population wants to remain in the Eurozone without accepting the terms of the creditor nations. However, the fatigue amongst the creditor nations with the negotiating tactics of the Greek government has reached the point, that a Greek exit from the Eurozone is now considered as a viable alternative. According to The Guardian, Merkel told Tsipras that the vote was “a choice between the euro and the drachma”. A NO vote would not necessarily immediately lead to a Greek exit.”

“We might actually see Greece also default on the ECB reimbursement on 20 July, without adverse consequences. However, this would necessitate the ECB to continue providing ELA to the Greek banks (already a stretch) and capital controls and limits on bank withdrawals will have to remain in place to avoid a collapse of the banking sector. However, a “no” vote and a default on the bond held by the ECB, even if not technically, is very likely to trigger an end to ELA. As a consequence, Greek banks would need to be recapitalised (and/or nationalised) with money the Greek government does not have. IOUs or a dual currency would be the solution and, consequently, lead to a Grexit.”

“In all cases, one thing seems quite sure: the recession in Greece would most probably deepen and more unrest is to be anticipated.”

The Research Team at ING previews the possible answers to the Greece referendum and whether Grexit will be the outcome.

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