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Greeks Say No To Creditors

Sunil Swami, Chief Investment Officer | JUL 07, 2015

OXI

OXI is “NO” in Greek.  This is what the Greek voters said, in an unprecedented referendum on Sunday, July 5th,  when they overwhelmingly voted against the bailout terms demanded by the country’s creditors.  61 percent of voters backed Prime Minister Alexis Tsipras’s rejection of further spending cuts and tax increases.  Tsipras believes this gives him a mandate to negotiate better terms with the IMF, the ECB, and the EU – also known as the “troika”.  Tsipras said Athens would return to the negotiating table on Monday and as a gesture of goodwill replaced his finance minister, Yanis Varoufakis. Mr. Varoufakis had repeatedly clashed with negotiators from the “troika”. 

What Happens Now?

We believe it is unlikely the creditors’ proposals will be significantly relaxed as a result of the “no” vote. It will now be impossible for the Syriza-led government to accept the deal currently on the table, which means that the risk of a total collapse in the negotiations and Greece’s exit from the Euro and the EU has increased significantly.  Early indications suggest that the Germans are not ready to change the terms of the deal and have asked Mr. Tsipras to come up with a proposal by Tuesday, July 6th.  In the meantime, the ECB has decided not to raise the limits of its Emergency Loan Assistance to Greek banks, making it difficult for the government to lift capital controls and open the banks.

Market Reaction

The reaction of financial markets has been relatively muted.  While stocks were down Monday along with the Euro, investors had feared much worse.  Some of it is due to the fact that a lot of damage was done last week when the referendum was announced.  The market also believes that problems in Greece have been ring-fenced and the ECB would be able to contain financial contagion.

We believe that the market is a little complacent. Should negotiations between Greece and the “troika”stall, and if it becomes clear that Greece would head for the exits, the risk of more damage to risk assets is quite high.

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About the Author

Sunil Swami, Chief Investment Officer

Mr. Swami has decades of experience in the investment management and related fields.

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