Over the weekend, Greece shut its banks and imposed capital controls after failing to reach an agreement with its creditors. The country is now heading for a referendum on whether to accept more austerity measures in return for extra aid. Markets have had strong reactions to the news, with European stocks and prices on eurozone peripheral government bonds all tumbling on Monday morning.
Here's a roundup of what analysts say is next for Greece.
Citigroup economists led by William Buiter and Ebrahim Rahbari, who's credited with coining the "Grexit" phrase, say the country is still unlikely to leave the eurozone:
We expect the referendum to result in a comfortable majority for the ‘Yes’ camp – the camp favoring acceptance of the latest offer of the institutions ... So, given a convincing ‘Yes’ vote in the referendum, we expect no Grexit this year and a lower risk of Grexit in subsequent years, a gradual normalization of Greek bank access to the ELA and a gradual end to capital outflow controls, deposit withdrawal controls and other controls on external payments. Either a belated extension of the European program (expiring on 30 June) or a new interim program, to take us close to the end of the year, would probably be negotiated. If the Greek authorities comply with the terms of this extension or interim program, this could set the scene for a new one-year or even multi-year program after the end of 2015. Given the track record of the Greek authorities on the structural reform front, however, it is likely that disagreements and tensions between the institutions and the Greek government could flare up again soon. A rerun of the scenario since the beginning of 2015 is therefore possible in our view. We term this the ‘kicking the can down the road and hoping-against-hope for a better outcome’ scenario.
Macquarie analysts led by Edward Firth say a Grexit is now a possibility - though they figure its effect on the European financial system should be contained:
Up until now our view on the Greek situation has been that, however unjustified, the European authorities would produce some fudge that would avert the current crisis and kick the can further down the street. News over the weekend that Greece have terminated negotiations and called a Greek referendum for next Sunday to vote on the European bail-out proposals, rocks that central scenario. There must now be an increasing probability that Greece will leave the European Union/single currency ... European banks have had a number of years to prepare for such a scenario, and the direct impact should be both limited and manageable. BIS highlight total foreign European bank exposure to Greece as €45bn or c4% of sector market capitalzation. However, the secondary implications of a default and chaotic nature of process are less easy to define but arguably more significant – impact on confidence, higher risk premiums/peripheral bond yields, unexpected losses through derivatives/third-party structures, etc, etc.
Speaking of which, Deutsche Bank Strategist Jim Reid warns that we are in for a whole bunch of technical questions surrounding the event, including whether credit default swaps (CDS) written on Greece could be triggered.
There are going to be lots of technical questions as a result of this move to referendum and what seems certain to be a non-payment to the IMF tomorrow. Will it immediately be termed a default? Will it lead to a cross-default on EFSF loans, GGB and Greek CDS? It might not immediately (the EU for starters might wait until after the referendum) but the debate will start. However I think it’s important not to get too bogged down in the technical details at this stage as surely the likely result of the referendum is going to be the most important event this week and ahead of this the perception as to the result.
Credit Suisse analysts led by Neville Hill highlight that events in Greece could have far-reaching effects:
Outside Greece, the focus will be on the scale of financial stress and how the authorities seek to contain it. The range of options open to the ECB to raise the pace and scale of its peripheral sovereign purchases may contain the risks, but we expect immediate upward pressure on euribor as cash-hoarding causes the inter-bank market to stop functioning. From a market standpoint, we expect the chances of a September Fed hike to be priced out as investors run for the 'safe haven' of Treasuries, gilts and, to a lesser extent, Bunds. Swap spreads and credit curves should widen and flatten, while expected French and Spanish supply should add to the pressure to widen peripheral sovereign spreads. In FX, we expect demand for traditional 'safe havens' (JPY, CHF and, to some extent, USD) to dominate.
While Bank of America Merrill Lynch strategists James Barty and Tommy Ricketts say that, despite all the Greek drama, now is the time to buy European assets:
Even if the initial reaction is one of risk off, we have argued in the past that we expect the European authorities to intervene in such a way as to limit any fallout from Greek default or exit. The statements over the weekend appeared fully consistent with this notion. Our economists have argued that it is likely that the ECB would tweak QE to support peripheral bond markets. Given our view that even a Grexit would be unlikely to trigger contagion on a significant scale, we would expect such support of bond markets to act to stabilize equity markets too ... To our mind therefore, any risk off reaction among investors is unlikely to be sustained because the Euro authorities would act to dampen any market turmoil and crucially ensure that the euro area recovery remains intact. We would therefore counsel patience, with the objective of looking for a buying opportunity for European equity markets, either on a Yes vote in next week’s referendum or on Euro area/ECB intervention to calm markets.
The only sure thing about Greece is that analysts will have plenty to write about this week.