After the ‘No’ vote, Grexit not a foregone conclusion

The Greek referendum appears to have led to a large victory of the 'No' vote. At 1am CET, with 90% of the vote counted, the 'No' was largely ahead with 61.5% of votes. A "reject" vote at the referendum marks a first step towards Grexit and now see 65% chance of Grexit. Avoiding Grexit is possible but will be difficult. Although French policymakers have signalled their willingness to reach a deal, there is no indication that the Troika stands ready to offer Greece a better deal in terms of reform effort, all the more as Greece will need a much larger bailout package (€60-80bn) than what was previously discussed.

In the coming weeks, political uncertainty will remain despite the large victory of the 'No'. First, Greek Constitutional Court will have to legitimate the referendum. Secondly, the pro-European President Pavlopoulos might opt to resign this week, triggering new elections, to be held probably in late July or early August.

A full formal exit is unlikely to happen in the next few days or weeks. Both sides will try to resume negotiations in the coming days. Euro area policymakers are expected to make a statement that places the ball in the court of Athens (ie opening the door to a deal but with strict conditionality attached). If this process fails,  both sides are expected to coordinate their actions to manage the exit. 

It is clear that the ECB has no appetite to front run the political process and as long as discussions are ongoing between the Greek administration and the euro area it is considered unlikely that the ECB would fully cut the ELA and Greek banks' access to ECB liquidity facilities. But a request of resolution of some Greek banks seems likely in the meantime, which would put pressure on policymakers to make a decision.

The following developments are also seen: 1) Given the timelines involved, it seems likely that after missing the June payment on the IMF, Greece will also default on the ECB on 20 July (and probably on 20 August); 2) Capital controls will not go away anytime soon; 3) the Greek government will issue IOUs.

While the baseline scenario is that contagion from Greece will remain modest thanks to better tools (accelerating QE, ESM, OMT), there is a negative risk scenario that could influence policy decisions further afield and notably slow Fed rate hikes.