FXStreet (Bali) – George Saravelo, Strategist at Deutsche Bank, notes that if the ‘No’ vote wins, at looks likely to happen, it would open a wider range of possibilities for Greece, adding that notwithstanding, any agreement would likely require change that leads to a re-building of trust between Greece and its creditors, and that renewed attempts at negotiation are likely.
Key Quotes
“In the event of a “no” vote, the range of outcomes becomes wider and more uncertain. A number of European officials have stated that this would be equivalent to a Eurozone exit, but the position has not been consistent, most notably from Germany. Both Chancellor Merkel and finance minister Schauble have not been open subscribers to the view. As a result, renewed attempts at negotiation are likely.”
“On the one hand, the creditor position on the fiscal and structural policy adjustment is unlikely to change materially in the event of a “no” making agreement difficult. On the other hand, compromise can also not be ruled out: the positions separating the two sides on the fiscal adjustment have been closing, with the absence of a complete financing package and debt relief commitment being some of the key sticking points for Greece. The potential for a full ESM package to provide conditional commitments on debt (likely at the insistence of the IMF, but also conditional on reform) may allow greater scope for compromise than has been currently possible.”
“Alternatively, and perhaps more likely in the presence of persistent deadlock, it may be that the pressure from a deteriorating economy forces political change anyway. Four coalition government Independent Greek MPs have this morning voiced their disagreement with the referendum calling for its withdrawal and stating they would vote “yes” – this compares to a government majority of 11. Greek press has been reporting internal disagreements within the government with more moderate members calling for a greater willingness to compromise. A negotiated outcome on the back of broader changes and cross-party support may therefore also be possible.”
“This notwithstanding, deadlock remains the most important risk. The possibility of Eurozone exit – precipitated by a banking system that has exhausted all ELA cash buffers and is unable to finance the economy cannot be ruled out. The alternative would be a direct ESM bank recapitalization that would allow the Greek banking system to function without a fully-funded sovereign program: a suspension of ELA would put Greek banks under resolution with HFSF bank ownership being called by the EFSF under existing guarantees. A separate recapitalization program for the banks that would allow ECB liquidity provision not tied to Greek government-guaranteed collateral (currently more than 60bn EUR) may be a possibility.”
“Still, this would entail creditor willingness finance the Greek banking system in the absence of a government fully committed to structural reform and a sustainable fiscal position. The moral hazard implications for the rest of the periphery may be large, making this the least likely outcome.”
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