The Meaning of No--Initial Thoughts

It appears that a majority of Greek votes has been cast for the rejecting the creditors offer.  The government campaigned for this result.  Prime Minister Tsipras may find, however, that it has not strengthened his negotiating hand.  To the contrary, the range of options has narrowed, and the financial system is collapsing.  

Tsipras has said he will go to Brussels and sign a revised deal within 24 hours.  This is most unlikely. The second assistance program ended on June 30.  A new one will have to be negotiated.  This appears to require some parliaments, like Germany's, to authorize the negotiations.  It is not only a function of time but desire.  Judging from the IMF's report last week, without debt relief for Greece, the multilateral lender might not participate in a third program either.  

The ECB reportedly will meet to discuss the Greek central bank's request for new ELA access.  There is no reason to expect this to be forthcoming.  The job of the ECB is not to support banks unconditionally.  They need to be solvent.   Bank can use a broader range of collateral in ELA borrowings than on loans from the ECB.  There has been a concern that Greek banks were exhausting their supply of such assets.  The past week only exacerbated this pressure.  

Without ELA funding, the image of monetary asphyxiation seems fitting (though it gives the Greek government no reason, then, to threaten to hold its breath).  Banks are running out of cash. Some suggest that there are sufficient notes until around mid-week, but not one seems to know.   The longer it persists, of course, the greater the economic impact.  Business failures, in turn, worsen the quality of the Greek banks' loan book.  

A 2-bln T-bill matures on Friday, July 10.  To secure the funding, the government plans on auctioning bills on Wednesday.   Greek banks are primary buyers of the government bills, simply to roll-over their current holdings.  While this has been a fairly routine exercise, it could be more problematic this week.  It is worth noting the auction as a potential event risk.  

The results of the referendum do not necessarily mean that Greece will leave the monetary union. There are still many steps to get from here to there.  The political commitment to the irreversible nature of monetary union should not be under-estimated.  

The euro is set to open lower, but within the range seen a week ago.  A "no" victory was largely anticipated.  The key now is the response by policymakers.  The creditors may be somewhat more divided now.  Tsipras may feel bolder, but he is playing with the same or few cards now.   

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