"No" opens up a wide range of market outcomes
Acknowledging what we do not know is as important as bragging over our insights. Under a "No" vote there is a wide range of potential outcomes and given the unprecedented nature of this event, the probabilities associated with each are unquantifiable. It is clear though that the European risk premium is not elevated, and offers little buffer against an adverse scenario.
"No" offers an asymmetric payoff profile
Clarity on the extent of the contagion, the efficacy of any ECB policy response and any spill-over damage into the real economy will take time to emerge. But we see heavy losses under an adverse 'No' scenario against only modest gains under a best case 'No' outcome. Benchmarking against previous periods of risk adjustment in European equities suggests a 15% peak to trough move in the Eurostoxx is easily plausible.
The "No" vote is most likely to lead to a Grexit
According to exit polls, the 'No' won with 61% in yesterday's referendum. In this situation, we believe Greece is very likely to leave the Eurozone. As the euro is a political project, we cannot completely rule out a turn in the current situation; however, we struggle to see the basis on which a deal can be found, given the current deadlock comes by and large down to a conflict of ideologies.
Politicians will want to keep Greece in the EU
The Grexit process itself would be a mix of European politicians not finding a compromise with Greece, Greek banks running out of funding and Greek authorities having to issue IOUs and a parallel currency. Ultimately, we believe the EU will be very willing to provide support through EU mechanisms, but without keeping Greece in the straightjacket of the Eurozone.
The euro's long-run taint
Expect periphery spreads to open sharply higher on Monday, with the ECB having to increase buying to contain the situation. In our view, the growth effect of a Grexit on the Eurozone should be manageable, with a confidence shock being the biggest risk. However, the situation reveals the shortcomings of the euro, which means euro assets should have a risk premium in the long-run.