Pictet: Zeit der Entscheidung in Griechenland

With Greece certain to default on a EUR1.5 billion debt payment to the IMF and its banks denied additional emergency assistance from the European Central Bank, is the country destined to exit the euro whatever the outcome of Sunday’s referendum? 

No, but the probability of the country’s exit from the euro zone has risen significantly. The default on the IMF debt payment is all but certain (even though it will likely be labelled a “delay”).

The critical deadline, however, is July 20, when Greece is due to make a EUR3.5 billion debt repayment to the ECB. 

In the absence of a finance-for-reform agreement before then, a default on ECB-held debt will be unavoidable and could prove the trigger for Greece’s disorderly exit from the euro zone. A slightly more favourable scenario would see the creation of domestic parallel currency that would allow Greece to remain within the euro zone, although it is difficult to see how sustainable such a situation could be over the longer run.

The Greek referendum on the financing package proposed by the ECB/EU Commission/IMF – which is in effect a referendum on euro membership – complicates matters enormously.

The most troubling outcome would be a 'no' vote. Under this scenario, the ECB would cut off Greek banks from its emergency lending facility; Greek government bonds would no longer be accepted as collateral. This would entail a Greek debt default and lead to the country’s rapid exit from the euro zone. The potential for bank failures would rise, creating economic and political uncertainty that could spread beyond Greek borders.

Yet a ‘yes’ vote would not necessarily lead to a quick resolution. Although an endorsement of the new bailout package would, at first sight, give Greece another opportunity to secure an agreement with its creditors, it could just as easily create more political uncertainty.

The Syriza-led government's position in the event of a ‘yes’ vote remains unclear, and there is no guarantee the Troika would wish to engage in negotiations with the Greek prime minister Alexis Tsipras, with whom relations are tense. Trust is in extremely short supply.

In our view, the most positive – and most likely – scenario is a ‘yes’ vote coupled with the formation of a new, broader governing coalition with whom the IMF and euro zone policymakers can more easily negotiate.

This could potentially result in a less restrictive finance package that would offer Greece some debt relief.

It is worth pointing out that the US appears to be putting pressure on Germany to keep Greece within the euro zone and offer the country more wiggle room. The Obama administration is clearly concerned at the prospect of political instability in Southern Europe and wants to avoid this at all costs.

As things stand, opinion polls suggest the Greek population will vote in favour of the creditor proposal by a wide margin. But, with those polls having been conducted before the Syriza government said it would campaign for a ‘no’ vote, the outcome could turn out to be much closer.

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