Now Greferendum, Then What?

Another deadline is around the corner for Greece. This Sunday July 5th Greek people will vote in the so-called Greferendum and decide whether they’ll accept more austerity measures in exchange for financial aid or they will give Alexis Tsipras’ government support to continue rejecting demands for creditors.

While latests polls show a close call, Greek Prime Minister Tsipras has asked people to vote ‘NO’ in several occasions this week, assuring that the referendum is not about Greece’s  membership of the euro but instead a NO vote will give the government power of negotiation to get a better deal with the European Union, the International Monetary Fund and the European Central Bank.

What Do The Polls Say?

The latest opinion poll from Greek newspaper Avgi shows that Greeks remain divided 43% would vote ‘NO’, 42.5% ‘YES’, and 9% haven’t decided yet. Alco poll shows results as 41.7% YES, 41.1% NO while GPO poll anticipates 44.1% YES versus 43.7% NO. Either way, the outcome will be too close and it will be key for the Hellenic country. 

Even when some questioned if the vote is binding, the Greek government has stated it will respect people’s will. 

The International Monetary Fund published on Thursday a report suggesting that even if Greece continues to adopt tough austerity measures, the debt will remain “unsustainable” and only a large scale debt haircut and a period of grace of 20 years could lend the country’s some “breathing space”.

Prime Minister Tsipras was quick to echo IMF report and demanded 30% haircut of Greek debt from creditors and 20 years of grace while he urged Greeks to vote NO.

“I urge you to say #OXI / NO to ultimatums, blackmail & fear. To say NO to being divided. #Greece #Greferendum #dimopsifisma”, said on Friday PM via @tsipras_eu

What If The 'Yes' Wins?

If Grexit fears prevail, the Greek government will probably fall apart. While Finance Minister Yanis Varoufakis has explicitly said he will resign if Yes wins, Tsipras will most likely follow him and the country will have to add political turmoil to the economic crisis. If that’s the case, the Parliament could appoint a new government or call general elections. 

However, the most likely market reaction will be “risk-on”. The EUR could benefit from a YES vote as it will pave the way for a quicker agreement with creditors, but it won’t necessarily solve Greece’s long-term debt burden, which is about 180% of the GDP. On the other hand, the political crisis and uncertainty could weigh on the shared currency.

A Victory Of The 'No' Does Mean 'Grexit' Is Closer?

A ‘No’ vote would significantly increase the odds of a Grexit, but not imminently. The consequences are difficult to be measured and much will depend on how the Greek government seizes this outcome. 

Many EU officials have advocated against a NO. European Commissioner Jean-Claude Juncker said that Greece position will weaken instead of strengthening as Tsipras assures. German Chancellor Merkel, and Eurogroup head Jeroen Dijsselbloem have limited to say that negotiations will resume after the referendum.

What is certain is uncertainty rules and in this scenario a strong “risk-off” reaction could be seen. The euro will likely weaken as risk aversion arises.

Life Post-Referendum

Greece’s second bailout programme ended on June 30 after Athens and creditors failed to find common ground following five months of negotiations. On the same day, Greece missed a € 1.6 billion IMF payment which led the European Financial Stability Facility (EFSF) to declare a Greek default.

Although Greece requested a short extension of the program to keep financial system stable until the referendum, it was rejected by the Eurogroup. With Greece outside the aid package, the European Central Bank also rejected to raise the ceiling of loans via emergency liquidity funds (ELA) Greek banks could use and financial institutions were forced to impose capital controls on deposits. 

According to latest reports, head of Greece's bank association has said that liquidity safety net of €1 billion will last until Monday. 

Liquidity after Monday morning will depend on the ECB, with the Governing Council set to meet to discuss ELA again after the referendum. ECB member Ewald Nowotny stated that the cash reserves of Greek banks and if they open again on Monday, “will very much depend on the outcome of the referendum”.

In this line, a NO vote would likely keep banks closed, unable to face deposit withdrawals, now restrained to €60 per day.

Whatever the outcome of this referendum the Greek economy (and people) is likely to continue suffering.