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Greece “No” Vote on Bailout has Wide Implications

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Last Sunday Greeks took to the polls and delivered a strong vote against a continuation of troika-imposed austerity measures. What that might mean for the country—and for investors, too—remains to be seen, since markets did not instantly collapse on the news, nor was the country immediately shown the door on the way out of the Eurozone.

But that doesn’t mean it will be smooth sailing. Despite the resignation of Yanis Varoufakis, the country’s finance minister, as a means of smoothing the path to future negotiations with European creditors, Europe isn’t happy. German Chancellor Angela Merkel was to meet in Paris on Monday with French President Francois Hollande, and that was to be followed Tuesday with a meeting of Eurozone leaders to see where the group goes from here. Monday saw speculation that the Tuesday meeting could result in an expulsion of Greece from the Eurozone.

And that could happen, if European tempers continue to rise. Varoufakis may have stepped down, but that certainly doesn’t mean that Greeks are willing to accept the austerity measures Europe has been insisting on as conditions for additional assistance. And, despite the election’s outcome, Europe basically dismissed the election’s results as a bargaining chip for Athens—something it had hoped for—and immediately doubled down on pressuring Greece, putting the onus back on the country to come up with alternative proposals and saying that the next move was up to Athens.

Whether the country will come up with proposals that will allow it to remain in the Eurozone is yet to be determined, since all Greece’s proposals thus far to lessen the burden of required legislative changes and repayment of its debt have been rejected by its creditors. And while earlier, some banks were predicting that Greece will be leaving the currency group, that is certainly not a sure thing—particularly since Goldman Sachs and Citigroup weighed in to say that they both envisioned ways in which the country could remain in the Eurozone.

Sixty-one percent of Greek voters—a stronger showing than expected—vetoed the notion of continuing under the latest austerity offering from the Eurozone. And that surprised many. Not only were voters divided on the issue, the rest of the world took sides ranging from the IMF’s last-minute declaration that Greece would not survive under continuing austerity measures to German insistence that Greece simply must adhere to cost-cutting measures that Athens has protested were destroying its people.

But investors watching the situation will have seen that markets did not implode—at least not yet. Markets fell, but didn’t plunge; the euro was down, but didn’t crash—perhaps at least partly due to Varoufakis’s resignation—and bond yields of weaker Eurozone countries rose, but didn’t skyrocket. In fact, calamity did not ensue even after Greece missed its end-of-June payment to the International Monetary Fund, which said that the missed payment was not necessarily a default—even though Fitch Ratings had further dropped the ratings of the country’s banks.

Fitch said that it made the decision to act on Greece’s ratings, despite not being scheduled to do so till November 13, because “developments in Greece warrant such a deviation from the calendar….”

Fitch downgraded Greece’s long-term foreign and local currency issuer default ratings (IDRs) and senior unsecured foreign and local currency bonds by one notch to CC from CCC. While it affirmed Greece’s short-term foreign currency IDR at C, it lowered the country ceiling a notch as well, from B- to CCC.

Although its decision was made before the “No” vote in Sunday’s referendum, Fitch said in a statement at the time of the downgrade that “In our view, a ‘No’ vote would dramatically increase the risk of a Greek exit from the Eurozone. Such an exit would probably be disorderly as the current government is unlikely to cooperate with the European authorities in such an event.” In addition, Fitch said, deposit restrictions imposed by the European Central Bank because of the breakdown in talks “will further damage Greece’s economic prospects; [therefore,] we have revised down our GDP forecast to a contraction of 1.5% in 2015. The risks to the economic outlook remain tilted heavily to the downside, with a deeper recession following from a ‘No’ vote.”

Rumors of a planned Monday phone conversation between Greek Prime Minister Alexis Tsipras and Russian President Vladimir Putin could still throw a curve into the situation, as could any possible proposals Athens might come up with to offer its creditors. And Benoit Coeure, a member of the ECB executive board, said Sunday in reports that the bank was ready to act no matter what happened with the Greek vote. “The ECB has been clear that if we need to do more we will do more. We will find the necessary instruments,” he was quoted. “Our will to act in this matter should not be doubted.”

And the picture is not all doom and gloom for investors, either. While Nigel Green, founder and chief executive of financial advisory firm deVere Group, warned in research that “investors will be bracing themselves for increased volatility,” they will also be “gearing up for an important buying opportunity.”

Because of the “extensive negotiations taking place right now behind the scenes between Athens and its creditors,” Green continued, “I suspect that there will be a degree of debt relief for Greece, but Eurozone leaders will be aware of the considerable consequences of softening their stance too much.” A potential selloff in days to come that would cause prices to fall, and a move by many investors to “perceived safe havens such as gilts and U.S. treasuries,” he said, “will, of course, create an important buying opportunity, especially for investors with a longer-term perspective.”

Green added, “With negotiations potentially taking an extended period of time, the uncertainty is likely to be protracted, meaning the sell-off and buying opportunity could also last some time…. The buying opportunity will be seen as particularly attractive as much of the Eurozone is in recovering mode.”


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