Greece to Creditors: Heck NO

In what could easily be described as one of the highest stakes showdowns in the world today, the Greek people resoundingly voted ‘no’ to accepting conditions set by their creditors for a third bailout.


More than 60 percent of Greek voters rejected terms for additional aid set forth by what is colloquially known as the ‘Troika,’ a triumvirate made up of the European Central Bank (ECB), the International Monetary Fund (IMF) and the European Commission, the executive body of the European Union.


The ‘no-vote’ is a remarkable political win for the left-wing Greek Prime Minister Alexis Tsipras, and his often-outrageous finance minister, Yanis Varoufakis.  They now argue that the no-vote gives them more bargaining power with their creditors that will still secure a bailout with less onerous terms.


It’s still not clear how European leaders will respond.  Since the referendum was called last week, hard-liners have said that voting no would be the equivalent of the Greek people voting themselves out of the euro.


The key date now is July 20, when Greece owes 3.5 billion euros on a bond held by the ECB.  If the Greeks default on that bond, as they did on their 1.5 billion payment to the IMF, it would be hard for the ECB to continue to hold Greek bonds as collateral on their emergency liquidity assistance (ELA).


Remember that Greece had to close their banks and stock market when the ECB declined to provide Greece with additional ELA last week.  If the ECB continues the entire ELA program, the Greek banking sector would be further ravaged and without euros coming in, it’s quite possible that Greeks would be forced to start printing drachmas (or some other currency) to replace the euro.


It’s unclear how long banks may be closed.  When Cypress imposed similar capital controls in 2013, banks were reopened within 12 days.  In Argentina, they remained closed for a year. 


The trouble with this outcome is that the ECB doesn’t want to be responsible for kicking the Greeks out of the euro, arguing that it’s a political decision and shouldn’t be left up to unelected central bankers. 


Part of the problem for European leaders is that there is no provision for forcing a country out of the euro, leaving everyone in truly uncharted territory.


While we are clearly in an uncertain period, it appears as if markets are treating the referendum results like they did the capital controls last Monday.  The euro is down, S&P 500 futures are down and bond prices are up, but none of the price movement is out of the ordinary.


In short, there is a lot of news to digest, but, ultimately, nothing in Europe is going to change overnight and the impact on US markets is likely to be relatively small.  We should expect volatility, but, really, markets are holding up very well so far considering all of the activity.