More Sellside Reactions To The Greek Referendum

Today, Greeks sent a resounding message to Brussels, Frankfurt, and Berlin that they are not willing to acquiesce to further humiliation at the hands of creditors and that, even if it means braving the economic abyss in the short-term, the country is determined to salvage a better tomorrow from what, after today’s referendum, are the smoldering ashes of Greece’s second bailout program.

Now, a stunned sellside — which had, over the past three months, very carefully tweaked their base cases to reflect the growing risk of Grexit — is scrambling to explain to nervous clients what happens next.

Having heard from JPM earlier, we bring you the latest from Barclays, Deutsche Bank, and RBC.

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From Barclays:

A “no” vote means EMU exit, most likely

We argue that an EMU exit would become the more likely scenario, even if Greece remaining in the euro area cannot be ruled out. Agreeing on a programme with the current Greek government would be extremely difficult for EA leaders, given the Greek rejection of the last deal offered. EA leaders accepting all Greek proposals would be a difficult sell at home, especially at the Bundestag or in Spain ahead of the general elections.

How will the crisis play out? The bank liquidity crisis is likely to turn into a solvency crisis once the ECB shuts down ELA, probably no later than 20 July (when a EUR4.2bn payment to the ECB becomes due). Fiscal problems would become more acute; the government may be forced to issue IOUs, which effectively become a parallel currency to the euro. A new currency by the central bank of Greece is likely to eventually become necessary to inject both liquidity and recapitalise banks. At this stage, we would expect IOUs to be converted into the new Greek drachma (NGD).

The NGD would likely depreciate significantly and hence many local companies (clearly those in the non-tradable sector) and households would need to default on their foreign currency debt, now including euro-denominated liabilities. Many of the domestic contracts that are now denominated in euros would also become unviable and need to be restructured. Non-performing loans would surge because of: 1) the negative balance sheet effects for firms and households; and 2) the local currency needed to pay euro debts would increase with the devaluation, exceeding the increase in local currency revenue. Likewise, the government would also be forced to default on its euro-denominated liabilities.

Redenomination away from the euro would also cause massive transfers between agents, adding to the above-mentioned transfers between debtors and creditors. A majority of households with local accounts and savings will suffer substantial losses while cash rich agents with accounts abroad will be the big winners and could take advantage of the chaos to seize capital and production capacities. Given the weak state of the government, these redistributions would likely benefit the already oversized unofficial sector.

In short, the existing contracting framework and financial infrastructure would be broken and need to be rebuilt. Inflationary finance would likely be used, to some extent at least, to replace the official finance that now supports Greece. Politically difficult fiscal and structural reforms would still be required to make the country more competitive, and promote economic growth.

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From RBC:

In a normal referendum the next steps would be binary––something happens or it doesn’t. But this is no ordinary referendum.

We argued last week that the next steps for a ‘no’ or a ‘yes’ vote look superficially similar. The government and creditors will have to start negotiations on a third programme (since the second one expired on Tuesday). Both sides indicated they were willing to do so even in the event of a ‘no’.

What happens on Monday?

Various European-level meetings are expected to take place. These include a EuroWorking Group meeting (i.e. top-level officials from euro area finance ministries). This may then be followed by a eurogroup teleconference (i.e. finance ministers-level) to take stock of the situation. At the Leaders’ level, German Chancellor Merkel will meet French President Hollande for a bilateral in Paris, with both calling for a European Council summit to follow on Tuesday. Separate from the political proceedings, the ECB’s Governing Council is also expected to meet to discuss Emergency Liquidity Assistance (ELA) for the Greek banking sector, though this meeting has not yet been confirmed.

The first thing to watch is how Syriza responds

On Thursday, Greek Prime Minister Tsipras claimed in the event of a ‘no’ outcome, he would be in Brussels within 48 hours signing a deal. In practice that is almost impossible––any new deal will need a lot of technical work so at best is a few weeks away. But in the first 48 hours there should be some sign of what willingness there is to compromise on both sides. If Tsipras takes a defiant tone (citing the democratic choice of the Greek people) we expect Europeans leaders to respond that they are also democratically elected (as they did after the January election). In that case we would expect the market reaction to worsen.

The second thing to watch is how the ECB responds

The Governing Council is expected to meet on Monday to take stock of the situation. A Greek government spokesperson revealed that the Central Bank of Greece would submit a request to the ECB for a further increase to the ELA facility limit, which currently stands at €89.4bn. This follows from various press reports, including Bloomberg, indicating that Greek banks were struggling to cope with deposit withdrawals even with the capital controls already in place. Note that prior to the weekend, the head of Greece’s banking association, Louka Katseli, said that ‘liquidity is assured until Monday, thereafter it will depend on the ECB decision.” She added that the liquidity cushion banks currently had stood at about EUR 1bn.

We nevertheless consider there to be limited prospect of further extension to ELA at this stage, with the risks instead skewed towards the Governing Council restricting access to the facility, including by increasing collateral requirements further. An increase to the ELA limit was not a ‘given’ even if the referendum had yielded a ‘yes’ outcome, and as such a ‘no’ vote makes that decision even more difficult, in our view. Recall that ELA lending requires banks to post “adequate collateral”, and may only be provided to “illiquid but solvent” institutions. In the current environment, whether such conditions are satisfied is predicated in part on a judgment about the likelihood of a new financial assistance programme being agreed for the Greek sovereign.

Does this mean euro exit?

A ‘no’ outcome certainly increases the risk. This is particularly the case if the Greek government believes that it will have substantially more bargaining power with the institutions and brings more ‘red lines’ to the negotiating table. Much will depend on the tenor of discussions when they begin next week.

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Greferendum Results In Landslide “No” Victory

Update 2: with virtually all polling completed, the final result is 61.3% No, 38.7% Yes – a whopping rejection of Troika hegemony which may also be the final nail in any negotiations between Greece and the Eurogroup.

Update: The Greek interior ministry vendor Singular Logic projects that “No” vote will prevail with over 61% of vote in Greek referendum.

BREAKING: Greek interior ministry projection says ‘no’ camp will get more than 61 percent of vote.

— The Associated Press (@AP) July 5, 2015

It would seem that the Troika’s fearmongering campaign backfired:

S&P Futures Tumble 1.5% At Open: ES Down 33, Brent Under $60

The number everyone’s been waiting for all afternoon is finally here: moments ago ES opened for trading after the holiday weekend and it’s not pretty, down 1.5% to 2035 in early illiquid trading. Expect many wild gyrations especially if China, which is set to open in three hours, is unable to halt its market crash having now thrown everything and the kitchen sink at the relentless selling.

Eurogroup In Shock: Finance Ministers “Would Not Know What To Discuss” After Greferendum Stunner

Just out from Reuters:

FINANCE MINISTERS “WOULD NOT KNOW WHAT TO DISCUSS” AFTER EMERGING GREEK ‘NO’ VOTE-EURO ZONE OFFICIAL

More:

There are no plans for an emergency meeting of euro zone finance ministers on Greece on Monday after Greeks voted overwhelmingly to reject the terms of a bailout deal with international creditors, a euro zone official said on Sunday.

Greece Contemplates Nuclear Options: May Print Euros, Launch Parallel Currency, Nationalize Banks

As we said earlier today, following today’s dramatic referendum result the Greeks may have burned all symbolic bridges with the Eurozone. However, there still is one key link: the insolvent Greek banks’ reliance on the ECB’s goodwill via the ELA. While we have explained countless times that even a modest ELA collateral haircut would lead to prompt depositor bail-ins, here is DB’s George Saravelos with a simplified version of the potential worst case for Greece in the coming days:

The ECB is scheduled to meet tomorrow morning to decide on ELA policy. An outright suspension would effectively put the banking system into immediate resolution and would be a step closer to Eurozone exit. All outstanding Greek bank ELA liquidity (and hence deposits) would become immediately due and payable to the Bank of Greece. The maintenance of ELA at the existing level is the most likely outcome, at least until the European political reaction has materialized. This will in any case materially increase the pressure on the economy in coming days.

All of which of course, is meant to suggest that there is no formal way to expel Greece from the Euro and only a slow (or not so slow) economic and financial collapse of Greece is what the Troika and ECB have left as a negotiating card.

However, this cuts both ways, because while Greece and the ECB may be on the verge of a terminal fall out, Greece still has something of great value: a Euro printing press.

It may not get to there: according to Telegraph’s Ambrose Evans Pritchard who quotes what appears to be a direct quote to him from Yanis Varoufakis, Greece will, “If necessary… issue parallel liquidity and California-style IOU’s, in an electronic form. We should have done it a week ago.

California issued temporary coupons to pay bills to contractors when liquidity seized up after the Lehman crisis in 2008. Mr Varoufakis insists that this is not be a prelude to Grexit but a legal action within the inviolable sanctity of monetary union.

In other words: part of the Eurozone… but not really using the Euro.

That’s not all, because depending just how aggressively the ECB escalates events with Athens, Greece may take it two even more “nuclear” steps further, first in the form of nationalizing the banks and second, by engaging in the terminal taboo of “irreversibility” printing the currency of which it is no longer a member!

Syriza sources say the Greek ministry of finance is examining options to take direct control of the banking system if need be rather than accept a draconian seizure of depositor savings – reportedly a ‘bail-in’ above a threshhold of €8,000 – and to prevent any banks being shut down on the orders of the ECB.

Greece stands defiant as no vote rails against wrenching austerity

Thousands take to Athens streets to celebrate referendum result, many citing personal devastation brought on by spiralling economy as reason for voting no

Democracy in Greece spoke on Sunday and the response was a resounding “no” to demands for more of the excoriating austerity that over five long years has been the price of keeping Europe’s weakest economy afloat.

In a referendum seen as the single biggest experiment in people power since the debt-stricken country crashed on the rocks of bankruptcy, 61% of voters rejected the terms of further financial assistance set by creditors at the European Union and International Monetary Fund. Lobbed at the heart of Europe with the force of a rocket launcher, the rejection was a cry of rage.

Related: Greece heads towards historic no vote against austerity measures

Related: Greece’s vote edges it towards euro exit, but the odyssey is far from over

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Greek referendum no vote signals huge challenge to eurozone leaders

Victory by Syriza party of 60% to 40% in polarising referendum presents nightmare for eurozone elites, particularly German chancellor Angela Merkel

Greece delivered a landslide no vote to the eurozone’s terms for the country remaining in the single currency on Sunday night, unleashing a seismic political shift that could derail the European project. The verdict confronts the EU’s leadership with one of its most severe