UPDATE: After The Referendum (as of 7/7/2015)

Posted by Laura Sarlo, Senior Sovereign Analyst on Jul 9, 2015 4:27:38 PM

After the weekend’s resounding "no" vote on the referendum and Finance Minister Varoufakis' departure, here's a refresher on our thinking:

Sarlo-Greece-11-20-14Three probable scenarios:

Negotiated agreement before the July 20 bond maturity to the European Central Bank (ECB). Following the resignation of Finance Minister Varoufakis, President Tsipras has named Euclid Tsakalotos to head the finance ministry portfolio. He is currently consulting the president and other political parties, and building a fresh negotiation team. The European Union would prefer to deal with a different government, but Tsipras' actions may create some opportunity for further negotiation. 

Grexit. This would be a clean, decisive move to create a new     currency and reject all outstanding liabilities and debt. It would likely have the greatest impact on global risk assets.

A mess. This is where we are today and where we could stay for longer than might seem reasonable. This scenario could mean many different things, including eventual euro exit, but we get there in a stumbling way, rather than a clean break. We believe it could mean circulation of  IOUs/coupons/drachma for some (but not all) kinds of payments, all while the government maintains its commitment to being in the euro area -- a kind of half-in, half-out scenario. It could also mean the banks stay closed for a more extended period. This scenario continues the ongoing headwind for global risk assets.

Three things to remember:

  • July 20 is not the deadline we may believe it to be. Sure, Greece owes the ECB $3.5 billion for a bond maturing that day, but just as so many previous deadlines have proven not to be "deadlines," the issues could easily continue past this date.
  • Markets continue to put a great deal of faith in the ECB. The ECB doesn't wish to be the final arbiter on Greece.  It wants to contain fallout, but it is constrained by its rules, jurisdiction and the political will of the European Union. Important to remember that the bank remains the lender of last resort to the euro area banking system, not the sovereigns. 
  • Greece moving away from the euro is far messier than a clean Grexit. We think there's a smaller likelihood of a clean outright break -- instead, we see much more scope for a muddy, stumbling process whereby Greece's relationship to the euro disintegrates over time.

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This blog post is provided for informational purposes only and should not be construed as investment advice. Any opinions or forecasts contained herein reflect the subjective judgments and assumptions of the authors only and do not necessarily reflect the views of Loomis, Sayles & Company, L.P. This information is subject to change at any time without notice.

Topics: Macro Strategies, Sovereign Research