Flash Notes:Greece Votes “NO”

The counting of votes has officially ended, with more than 61.3% of ballots having cast for “Oxi” (No) in a controversiallast-minute referendum that has divided Greece over the past week. The none-too-clear, 72-word question put to Greeksasked whether they accepted a (since-expired) deal proposed by their European creditors. Some have interpreted this asa vote on bailout terms; whilst others say it is ultimately a vote on Greece’s membership of the Eurozone, and even of theEuropean Union.

    So What Happens Now?

    Negotiations to restart.

    Whilst the vote marks a big political victory for Greek Prime Minister Alexis Tsipras, the relationships between Europeand Greece have been damaged. European leaders and the ECB have emphasized that a “NO” referendum result willchange the negotiating climate for the worse. That said, Greece is likely to request immediate restart of the negotiations.

    Hence, the next important step is on the willingness of both sides to negotiate and under what conditions.

    Merkel and Hollande will meet.

    As yet, no emergency meeting of Eurogroup Finance Ministers has been planned. The next scheduled meeting of theEurogroup is on 13 July. But we believe there will most likely be an extraordinary meeting in the next couple of days. Asit is, German Chancellor Angela Merkel will travel to Paris on Monday to discuss the situation after the Greek plebiscitewith French President Francois Hollande.

    ECB to decide on ELA policy.

    In the meantime, given the significant implications that any ECB’s restrictive decision on ELA could have on the Greekbanking system, the ECB’s Governing Council meeting on Monday will be crucial. Greek banks are reliant on the ECB’sELA support of EUR89bn. And last Wednesday, the ECB decided to keep its ELA provision unchanged at this amountwithout any increase in the haircuts on ELA eligible collateral. If the ECB does not extend additional ELA, it is verydifficult to see how the banks can open on Tuesday as planned. In fact, an outright suspension would effectively put thebanking system into immediate resolution and would be a step closer to Eurozone exit. Now, even if ELA is maintainedat its current level, capital controls are likely to last much longer. But the ECB has so far avoided taking overtly politicaldecisions during this entire crisis, so we think it will avoid pulling the plug whilst talks are still going on between Greeceand its creditors.

    Crunch date is 20 July.

    The next major deadline is 20 July, when the Greek government has to redeem EUR3.5bn worth of bonds held by theECB. A missed payment to the central bank may be the tipping point for the Greek banking system.