Greeks voted yesterday to reject the austerity package presented to them by European creditors that was a precondition for further financial aid. The vote now sets the stage for further negotiations between the Greek Government and the rest of Europe and seriously calls into question Greece’s future as part of the Eurozone. Some market strategists now put the probability of a Greek exit as high as 55%, up from 40% prior to the vote. We are watching how the European Central Bank (ECB) handles the Greek banking system, which has been closed for the last week. July 20th is now a key date as Greece owes 3.5B Euros on a bond held by the ECB. The ECB has effectively kept the banks alive by providing them emergency credit access. Greek banks have used Greek Government Bonds as collateral for this credit access, but if Greece defaults there is a possibility the ECB could impose a haircut on this collateral, which would effectively push Greek banks into bankruptcy. So while headlines will continue to cross the wire on headline negotiations between Greece and Germany, France, etc.., the banks and July 20th will ultimately be what really matters in this saga. Market action today has been as expected, with safe haven assets such as U.S. Treasurys rallying and risky assets such as stocks selling-off. Overall, the moves have been orderly as the path to a Greek exit from the Eurozone had been at least partially priced in.
Sources: Financial Times, RBS, Wall Street Journal