The verdict is in, and a in a resounding landslide victory, the Greek people have chosen to turn their backs on the last bailout extension offer from the Troika, choosing to brave the short-term economic abyss as opposed to withstand further austerity measures. Though we have mentioned here before that a ‘No’ vote would not automatically result in expulsion of Greece from the monetary union, the risks are now more pronounced of this materializing given the roadmap (or lack thereof) ahead. The near-term implications of the referendum results are that Tsipras will be back at the negotiating table with the Troika to try and resurrect the smouldering ashes of Greece’s second bailout programme, though while his political hand has strengthened, we are skeptical the creditors bend as a result of the weekend’s developments and make the sort of concessions that Greece is looking for. While the Syriza government may have generated some bargaining clout given the size of the ‘No’ vote combined with last week’s IMF report that some debt relief is necessary for a successful third bailout program, the moral hazard issues for the Eurozone suggest that we are still a long ways from a resolution.
Arguably the most important near-term event will now be the ECB’s decision on the Emergency Liquidity Assistance (ELA) facility for Greece, as bank liquidity will likely be fully exhausted over the next few days. At this point it seems likely for the ECB to maintain the current ELA cap, as increasing the collateral haircuts would exacerbate the already precarious position and force the banking system into insolvency, while raising the ELA facility from current levels is akin to “throwing good money after bad” given there is no current bailout program for Greece. Maintaining status quo of the ELA is not in the best interest of the Greek government as banks are close to running out of notes at the ATM, and in a few days the government might have to issue California-like IOU’s as a form of parallel currency in order to meet their near-term obligations. The ELA is a lever the ECB could use from a bargaining perspective as the lack of liquidity will continue to crush domestic business, but the bank holiday last week leading up to the referendum seems to have little effect on the overall population from a political standpoint.
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