Greek referendum: “No” most likely means EMU exit

On Sunday 5 July, the Greek voters rejected the last deal proposed by the Institutions. At the time of writing, with 75% of the vote counted, the government supported stance had received 61.5% of the votes cast - a stable outcome, since in early counting, the participation rate was slightly over 61%.

While Chancellor Merkel and President Hollande are scheduled to meet tomorrow, EMU exit now is the most likely scenario. Agreeing on a programme with the current Greek government will be extremely difficult for EA leaders, given the Greek rejection of the last deal offered and will be a difficult sell at home, especially at the Bundestag or in Spain ahead of the general elections.

The ECB Governing Council will meet tomorrow to decide on ELA. ECB's GC is expected to shut down ELA at the latest by 20 July. Assuming that all of the pledged collateral at the ECB is recorded at (close to) par on Greek banks' balance sheets and that current average haircut on collateral is 50%, then retention of the collateral by the Eurosystem would translate into a more than €30bn loss for the banks. This alone would wipe out shareholders' equity. The Greek central bank will eventually need to print its own currency in order to inject new liquidity and capital.

The direct exposure of other EMU member states and the Eurosystem amounts to 3.5% of euro area GDP, while exposure of European banks to Greece has fallen to less than one-tenth of that. Even with low recovery values, direct losses should be manageable. Contagion remains the key concern.