All the world’s financial markets are focused on Sunday’s referendum in Greece when citizens of the world’s oldest democracy will vote on whether to accept terms of a new agreement that could salvage the Greek economy.
A No vote, which has been championed by Greek Prime Minister Alexis Tsipras, could pave the way for a Greek exit from the euro zone and all the complications that would ensue. But a Yes vote is not seen as a panacea that sets things straight once and for all. It’s complicated.
“The key takeaway for the U.S. investor is this: A No vote is not priced into the market,” says Sassan Ghahramani, president and CEO of SGH Macro Advisors, a consulting firm focused on global economic issues. It won’t be a “Lehman moment,” Ghahramani says, referring to the financial chaos that followed the demise of Lehman Brothers. But “the Euro could drop a lot and the dollar strengthen a lot and the Fed, which wants to hike in September, won’t want to raise rates.”
In that scenario, the Fed’s inflation outlook for inflation would fall, moving away from the 2% target it wants to see before raising rates, and long-term Treasury rates would decline at a time when the Fed wants rates to rise across the yield curve. (The Fed can only raise short-term rates directly.)
Most immediately, a No vote means Greek banks would go bankrupt, which would also impact their subsidiaries in neighboring countries including Bulgaria, Servia, Albania, Cyprus, Romania and Macedonia, says Jacob Kirkegaard, senior fellow at the Peterson Institute for International Economics. Eventually it could mean that Greece leaves the eurozone, which raises questions about the long-term viability of the precedent-setting economic experiment.
A Yes vote, in contrast, would yield a positive reaction in financial markets, says Kirkegaard. “It’s the least bad outcome and means there is not a Grexit (a Greek exit from the eurozone). But even a Yes vote is very problematic,” says Kirkegaard.
Greek banks, which have essentially been closed all week, will not automatically reopen and still need liquidity. And a Yes vote would be a defeat for the current Greek government, which raises questions about who Greece’s creditors—primarily the IMF, ECB and European Commission – could negotiate with.