Greece decides about euro exit, but contagion subdued

Greece's referendum vote this Sunday is ultimately a decision on its membership in the euro, even if PM Tsipras denies this. We find it very difficult to imagine how, after a 'no' vote, Greece and its creditors could successfully negotiate a new financial support programme, which would be necessary to keep Greece in the euro. 

Having already defaulted on debt to the IMF, Greece would then also default on its debt to the ECB on 20 July, fully cutting Greek banks off from any ECB liquidity support and worsening the economic situation further. Whether or not an 'exit' from the euro is officially declared, some form of parallel currency would have to emerge (eg, starting with government IOUs to pay for wages and services). This would more likely than not lead eventually to a full redenomination at some point. 

Indeed, given how far political relations and economic developments have deteriorated, turning the situation around will be a significant challenge, even in the case of a 'yes' vote. 

"We remain hopeful of a 'yes' vote and a subsequent agreement between Greece and its creditors, but the history of missed deadlines, failed negotiations, setting of new deadlines and repeated failures suggest one should retain a healthy dose of scepticism",says Barclays.

The markets' limited reaction to the negative news from Greece since last Friday would seem to suggest that investors have decided that Greece contagion will remain contained. 

An eventual Greek exit would raise issues of a new type (eg, a loss of the 'irreversibility' logic and the need for official write-downs on Greek debt, including target-2 imbalances etc). These issues could trigger political dynamics that are difficult to predict and that could become a new source of contagion.