A 'No' To The EUR? - Credit Agricole

The Greek referendum resulted in a resounding 'No' to the creditors' reform proposal. Despite growing market speculation, however, we still doubt that the outcome will result in Grexit anytime soon. Indeed, the Greek authorities have repeatedly stated in the past that they want to avoid the disaster scenario. In addition, officials on both sides will resume talks at an emergency EU summit scheduled for tomorrow. The markets seem to be settling down after the initial shock as they await the next chapter of the Greek saga.

The referendum outcome has seemingly strengthened Athens' position and could make Greek calls for debt restructuring more vocal. That said, this would also result in lengthy negotiations during which the administration will have to find ways to keep the Greek economy afloat. This could mean extending capital controls and raiding savers' deposits - a de facto bail-in similar to Cyprus - or the issuance of IOUs, which can be converted into EUR once a deal is reached. Domestic appetite for this 'parallel currency' could be limited, however. The 'No' vote should thus increase the pain for the Greek people without bringing a resolution much closer. Social and political tensions should grow. In turn this could increase the willingness for a compromise over time.

For the creditors, the 'No' vote was a strong signal that the backlash against fiscal austerity has reached a boiling point in Greece. The outcome need not mean that the creditors will panic and push for a hasty resolution, however, and they could stick to the current strategy of denying Greece access to funding. This remains the only way to ultimately discredit the Syriza promise that Greece could stay in the EUR but not pay its bills.

That said, the Greek creditors will still try to avoid Grexit. They are aware of the fact that, by setting a precedent, a potential Grexit could set in motion processes that could ultimately lead to the break-up of the Eurozone. All this could mean that a deal could be still possible.

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