Greeks surprisingly voted against Sunday’s referendum, with 61.3% of voters rejecting international creditors’ conditions of austerity measures and bailout terms.
In light of the unexpected decision, we believe there is now a higher probability of a “Grexit”—Greece exiting the Eurozone. If that should happen, we suspect it could be a slow and complex transition. And while there is still the possibility of a compromise, we believe the hurdles remain high.
Additionally, Greece’s finance minister Yanis Varoufakis surprisingly resigned on Monday, a move which may help future negotiations.
Here’s a look at potentially what’s next in this fluid situation:
- The result of the Greek Referendum has introduced more uncertainty into financial markets and potentially made the situation in Greece even more unpredictable.
- Markets may be hurt by negative investor sentiment and increased volatility.
- The European Central Bank (ECB) is likely to continue to freeze emergency liquidity. Banks will probably remain closed.
- The most important near-term issue is the capacity of Greek banks to re-open. Commentary from the ECB may be key, as we believe headline-driven markets could make a comeback.
- We expect heightened volatility and market pressure on European assets, including a potential widening of peripheral spreads and a fall in the Euro.
- While European politicians have offered little immediate response, German Chancellor Angela Merkel and President Francois Hollande are meeting Monday, a Euro leader summit is scheduled for Tuesday, and Euro group finance ministers are also set to meet Tuesday.
- While markets may be volatile in the coming days, we currently do not expect a repeat of the systemic and existential threats to the Euro area as a whole that emerged back in 2011-12. This is largely due to a shift in Greek counterparty exposure away from the private sector to the official sector.
The European Central Bank (ECB)’s quantitative easing program has also been supportive of European markets. We believe the ECB may ease further if markets become more volatile.
While Greece may continue to take center stage this week, we believe investors should also keep on an eye on key US economic releases. The Institute for Supply Management’s nonmanufacturing index rose in June from a month ago. In addition, minutes from Federal Reserve’s policy meeting last month (ahead of the intensification of Greek risk) are scheduled to be released on Wednesday.
