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29 June 2015

Paul O'Connor, Co-Head of Henderson's Multi-Asset Team, discusses Greece's decision to call a bailout referendum on 5 July. He explains that the government will be campaigning on the 'no' side to reject the bailout - but even if the people vote 'yes' to accept it, this opens the door to a whole new set of uncertainties for the country.

An ultimatum on democracy

The decision by the Greek government to call a referendum on the proposed bailout accord has brought to an end the long-running drama of negotiations and missed deadlines and has moved the Greek crisis into a more uncertain and dangerous phase. Presuming the referendum goes ahead, the Greek people will be asked on 5 July to vote either ‘yes’ to accept the bailout or ‘no’ to reject it. The government will be campaigning on the ‘no’ side, with Prime Minister Tsipras saying that Greece’s creditors had issued an “ultimatum towards Greek democracy”.

The Eurogroup of eurozone finance ministers interpreted Greece’s decision to call the referendum as a unilateral breakdown in negotiations and decided at the weekend not to extend the current bailout programme beyond 30 June. That means Greece is likely to miss the International Monetary Fund (IMF) debt repayment due that day. Paradoxically, it also means that the Greeks will be voting on a bailout programme that is no longer available to the country.

While the weekend’s developments have opened up many economic and political fault lines, the biggest strains are within the banking sector. Although the Greek banks are still receiving liquidity support from the European Central Bank (ECB) for now, they are nevertheless struggling to meet the accelerating demand for withdrawals. That is why the authorities have decided to close the banks for a number of days, and have imposed limits on bank transfers abroad and withdrawals from cash machines. The pressures on the sector will only intensify if the ECB decides to restrict this support later in the week in reaction to the expected failure of Greece to repay the IMF.

Uncertainty or uncertainty?

The latest evidence from the polls suggests that Greece will disregard the recommendations of the current government and will vote to accept a bailout. While that sounds positive, it opens the door to a whole new set of uncertainties. What sort of bailout package, if any, would be available to the Greeks given the Eurogroup’s distrust of the current government? Would a ‘yes’ vote lead to the formation of a new government? How stable would that be? If Greece decides to hold a general election, how will the economy and banking system survive the run-up to that? Can Greece avoid defaulting on its borrowing from the ECB on 20 July?

If that sounds tricky, the prospect of a ‘no’ vote is even more ominous. Under this scenario, it is unlikely that the Troika would come up with an offer that is more acceptable to Greece. In that case, Greece would almost certainly default on ECB lending on 20 July, forcing the ECB to restrict liquidity support for the Greek banks, and further accentuate the economic squeeze on the country. A ‘no’ vote would mark a decisive, albeit reversible, step towards Grexit.

Whatever it takes

At this stage, it is difficult to see anything other than a continued deterioration in economic conditions in Greece, given the general backdrop of bank holidays, capital controls, and political uncertainty, and the specific impact of these on tourism and government revenue.

The first reaction of global markets to the weekend’s developments has been a predictable risk-off reflex, although the impact on peripheral debt spreads (a key barometer of contagion) has been fairly modest. While tensions in Greece remain elevated, investors will naturally be concerned about the potential risk of financial, economic, and political spillovers into other eurozone countries. The fact that these developments are taking place against the backdrop of a sizeable correction in Chinese equities is far from helpful. Still, while we think that the deteriorating situation in Greece does merit a general lowering of investor risk appetite, we see scope for the ECB to deliver a substantial policy response if economic and market conditions do deteriorate significantly.

Paul's co-head, Bill McQuaker, is lead manager of the Elite Rated Henderson Multi Manager Income & Growth fund.


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Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Paul's views are his own and do not constitute financial advice.