The “No” vote in the Greek referendum this morning has moved Greece a step closer to exiting the Euro zone. The immediate issue now is the willingness of the various parties to resume talks.
The Greek Prime Minister has, not surprisingly, already announced his willingness to resume negotiations. But he will need willingness to resume discussions on the part of the institutions and Europe’s political leaders for any progress to be made. In that regard the upcoming meeting between German Chancellor Angela Merkel and French President Francois Hollande will be critical as will the EU summit that has been scheduled for Tuesday.
The next critical date is July 20 when Greece is scheduled to make a €3.5 billion payment to the European Central Bank. In the meantime expect more Greece-related market volatility and no rush on the part of European leaders to find a resolution too far ahead of that date. As I said last week Greece is already getting a taste of life outside the Euro zone which will put public pressure on its own Government to find a way-forward while remaining in the common currency.
Predicting the outcome from here is challenging because it’s largely about politics. Politics made the early part of the crisis easy to predict: bail Greece (and others) out or precipitate the failure of the Euro project. But politics has also meant the elephant in the room - Greece’s elephant-sized public debt - hasn’t been able to be dealt with. No European leader has yet been prepared to tell their tax-payers they are going to wear the cost of a Greek debt write-off, let alone deal with the moral hazard implications for Portugal, Ireland, Spain and Italy.
Debt relief, at least without significant concessions from Athens, is still a step too far. However, post-referendum, Mr Tsipras thinks debt restructuring is on the table and his negotiating power is enhanced. I think that's optimistic.
So the odds of a Greek exit from the Euro-zone just went up. But, while the strength of my conviction has diminished over the last couple of weeks, I still think exit will be avoided. But that view continues to rely on the point that no-one wins if Greece does exit – and the biggest loser will be Greece itself.
Last week we published an Insight Paper “Greek Turmoil and the Potential Implications for Investors”. The section on implications for investors remains valid. You can find that paper here.