Flash Notes-Greece: Initial Reaction Muted, But Still No Clarity

Financial markets have responded to the Greek “NO” vote in a rather orderly and measured fashion. Thisessentially reflects the belief that the weekend referendum vote does not really change the odds of a ‘Grexit’ orthe chance of a deal very much.

    Greek Finance Minister Quits.

    To a certain extent, markets also took comfort from the resignation of Greek finance minister Yanis Varoufakis, inan announcement shortly after the results came through. Since Varoufakis was clearly a point of tension in thenegotiations, his bowing out is thought to be an encouraging signal that Tsipras is willing to make newconcessions to get a deal done. Euclid Tsakalotos, who has been a part of Greece’s negotiating team, was sworn inas his replacement.

    ECB Maintains ELA For Greek Banks.

    In the meantime, the ECB, which has been keeping Greek banks afloat during this period with emergency aid,increased the pressure on Greece’s banking sector by adjusting the collateral requirements for the ELA line thecountry has depended on heavily. While the amount of accessible liquidity was kept unchanged, the ‘haircuts’ toGreek government debt used as collateral to free up much-needed Euros was reportedly raised to 45%. Thisannouncement came not long after Greece announced it would extend the bank holiday closures and capitalcontrols until at least Wednesday (8 July).

    Tuesday’s Emergency Summit Eyed.

    All eyes will be on the Eurozone summit in Brussels on Tuesday (7 July) which begins at 1100GMT (7pm Singaporetime). Following the meeting between German Chancellor Angela Merkel and French President Francois Hollandeon Monday (6 July), Hollande noted that “The door is open to discussions. It’s up to the government of AlexisTsipras to make serious, credible proposals so that this desire to remain in the euro can be translated into reality”.

    Meanwhile, Merkel said “It will be important that the Greek Prime Minister tells us how this should move forward.

    The last offer that we made was a very generous one. On the other hand, Europe can only stand together, if eachnation takes on its own responsibility”.

    As things stand, we think it is still just about possible for some sort of a deal coming through which will keepGreece inside the Eurozone; but little is likely to be clarified in the near term as EU policymakers weigh theiroptions. Besides, the clock is ticking. And it could be a huge challenge for both Greece and the creditors to find anew solution before what now looks like the crucial deadline of 20 July, when Greece is due to make a EUR3.5bnbond payment to the ECB. A default on that payment would surely make it impossible for the central bank tocontinue to prop up the Greek banks.