As EUR/USD closes the big Sunday gap as more developments are awaited, there is a lot of speculation about the referendum results.
The team at Credit Agricole analyzes the implications of the Greferendum:
Here is their view, courtesy of eFXnews:
Last week the Greek PM Alexis Tsipras called and the Greek parliament approved a July 5 referendum on the creditor’s reform proposal that could give Greece 5 months of bailout extension and cover their payments due until the end of the year. The latest development is not entirely unexpected. We have argued in the past that a referendum maybe the only way for Syriza to try to keep Greece in EUR without officially crossing their so-called ‘red lines’.
But make no mistake, the upcoming referendum is in fact a referendum on the Greek membership in the Eurozone. Indeed, if the people of Greece turn down the reform proposal, the country will end up with no creditor funding (and no ECB support for its banks). A default should follow and, with Greece still cut off from the global capital markets and with no sovereign default resolution mechanism in place in the Eurozone, the government will be forced to raid domestic deposits or issue IOUs. The latter will be in violation of the EZ treaties and mean Greece should ultimately leave the EUR.
Needless to say, social tensions should escalate and political uncertainty soar, pushing the economy closer to the precipice. Given the gravity of the decision, we still think the people of Greece will choose to stay in the EUR and agree to the creditors’ reform proposal on July 5. Of course, there are risks to that view, not the least the fact that the same people who supported the anti-austerity Syriza would vote against the reform proposal. Even in this case, however, it is worth highlighting that Syriza came to power in part because of very low voter turnout in February.
In the near term, the latest developments would suggest that Greece will not be able to pay back the IMF on Tuesday. Given that this will lead to arrears only and not technical default, however, it may have only muted market impact.
The bigger uncertainty relates to the ECB’s decision to cap ELA yesterday. Media reports suggest that Athens has decided a six-day bank holiday as a result (eg ‘capital controls’ similar to Cyprus). The decision could fuel panic and unrest in Greece with savers worried that their money will be used to pay the government bills before long.
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