Greece: Referendum on 5 July – but on what?
The Greek government – in a surprise move – pulled out of on-going negotiations with its creditors and announced a referendum for 5 July on Thursday’s creditors’ proposal for the adjustment programme and the lending arrangement. In response, the Eurogroup has rejected an extension of the existing bail-out, thereby largely rendering Thursday’s offer moot, and raising the question what exactly the referendum question will actually address.
Let’s assume we know the question, what does the answer mean?
Assuming the question addressed in the referendum remains on the basis of Thursday’s creditors’ offer, it is not at all clear what either a “yes” or a “no” vote actually imply. Can a government that campaigned on a “no” vote deal with a “yes” result? How does Greece expect the creditors’ offer to change after a “no” result?
What is the ECB’s response?
How will the ECB react to the – now expected – expiry of the 2nd programme as well as the deteriorating funding situation of the Greek banks? Increased haircuts should be expected at the minimum, a cap to the ELA also seems likely. This in turn would result in either implicit (through closure of banks) or explicit capital controls.
Will Greek depositors render the ECB decision meaningless?
Irrespective of how lenient the ECB’s reaction, Greek depositors could render a continuation of ELA meaningless if deposit flight by stealth turns into bank runs as news reports seem to suggest. One surprise in the Greek saga so far has been how well behaved Greek deposit dynamics have been.
Market reaction likely to be very negative
We believe these latest developments will lead to a resumption of the trend decline in the EUR. Whilst we had been arguing for a strong policy response to a negative outcome in Greece, the timeline of the referendum is likely to introduce some delays to EU policymakers’ ability to act decisively. We therefore expect Bunds to rally, both outright and against swaps, and for the periphery to underperform, in line with our existing views.