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The Greek Referendum Milestone 

A Greek "no" on 5 July would bring Greece closer to outright debt default and, maybe, exit from the euro. Prolonged and difficult negotiations with and among creditors would likely follow. A "yes" vote would not immediately resolve all uncertainties, but would probably lead to a fairly swift agreement on an extended, third debt rollover plus some debt relief.

On Sunday, 5 July, Greek voters are, formally, asked to decide whether to accept or reject a complex series of tax and reform proposals made by the "institutions" (EU Commission, European Central Bank (ECB) and IMF), in return for a commitment to resume payments to Greece and to roll over its debt. The Greek government has called on voters to reject these proposals (i.e. to vote "no"), with prime minister Tsipras arguing repeatedly that by doing so the negotiating position of the Greek government would be strengthened. He also claims that a "no" would not imply that Greece would need to leave the euro.

The Consequences of a "No" Are Very Uncertain

Statements from the creditor side are less clear-cut: some argue that the proposals of the institutions are, de jure, no longer "on the table" since the official deadline for the program extension was reached (and missed) on 30 June; hence, the vote will not have any consequences. We disagree with this legalistic view and believe that something close to this "final" proposal can be revived fairly easily. In contrast, others are framing the vote as a fundamental decision about Greek membership in the Eurozone, if not the EU. Whether they are right, is harder to judge. In our view, the consequences of a "yes" are relatively clear, while the consequences of a "no" are much harder to assess, with greater uncertainty for Greece as well as the rest of the Eurozone.

Our base case is that there will be a "yes" majority in the referendum. Polls are volatile, but the key reason to expect a "yes" vote is that the economic situation is rapidly worsening in Greece; a majority of voters are likely to become increasingly worried that the situation could worsen further if they refuse the offer of the creditors. Moreover, a clear majority of the Greek population is in principle strongly pro-EU. Nevertheless it is important to also discuss the possible consequences of a "no".

"Yes" Vote Likely to Lead to Relatively Swift Resumption of Talks

A Greek "yes" vote, especially if decisive, would, in our view, be interpreted as a clear pro-EU, pro-euro statement. It would also constitute an acknowledgement by Greek voters that reforms and fiscal consolidation are needed. Given their complexity, it would not, however, be an endorsement of the detailed proposals of the creditor side. The response to a "yes" vote on the creditor side would, nevertheless, be very clear, in our view: the doors to negotiations would rapidly be re-opened. Moreover, there would also be a willingness to make some adjustments to the proposals. Most importantly, in our view, would be a likely acknowledgement that a further restructuring of Greek debt will eventually be needed.

Restrictions on Liquidity and on Cash Withdrawals Might be Eased

We also believe that the European Central Bank could well be willing to ease up slightly on the restrictions it has imposed on the liquidity provision for Greek banks, the so-called Emergency Liquidity Assistance (ELA). Hence, Greek banks might in turn be able to ease up on the daily amount of cash withdrawals for depositors. Note that a "yes" vote would likely calm nerves in Greece and thus gradually induce citizens to redeposit cash in their accounts. That would also ease the cash shortage of banks. Given the fragility of the Greek banking system, a complete lifting of limits on cash withdrawals seems unlikely in the immediate future, however. Also, whatever capital controls go into effect next week would probably remain in place for some time. Most positively, however, the risk of a severe downward spiral in the Greek economy would, in our view, dissipate quite quickly, as the payments system improves and confidence returns.

Political Changes in Greece Will be Decisive

Given the willingness of creditors to re-start discussions, the speed with which an agreement can be reached with the creditors will largely depend on any political changes that follow a "yes" vote in Greece. If the vote is decisive, it seems quite likely that Mr. Tsipras would step down in favor of some form of caretaker coalition government. Negotiations with such a – likely centrist – government would probably be fairly straight forward. Especially if the vote is close, the current government may try to remain in office, however, making negotiations more difficult. In this case, political uncertainty may persist for some time, possibly until new elections are called. However, given the mounting economic difficulties, a deal would, in our view, nevertheless have to be accepted.

"No" Vote Would Likely Harden the Greek Negotiating Stance

If Greek voters vote "no," the consequences are much harder to assess, in our view. First, the government would surely interpret this as a confirmation of its tough negotiating stance over the past months. It would be even less willing to cross the "red lines" it has defined, e.g. regarding cuts in pensions. In such a scenario, there is no reason to expect a major change in the composition of the Greek government, and the current administration would likely uphold its demands for a third bailout program, including debt relief. Hence, negotiations for any new program would likely be very difficult and extended.

Worsening Greek Economic Downturn and Default Likely

The precise response of creditors is difficult to predict but it seems quite unlikely, in our view, that the ECB would, for example, quickly ease up on ELA, as we presume would occur in case of a "yes" vote. On the contrary, the ECB may even decide to increase the haircut on collateral posted by Greek banks, especially if an official default occurs. Any lifting of capital controls would be very unlikely. The cash crunch in Greece would thus worsen, with the recession deepening, and social tensions possibly rising. In terms of relations with creditors, a major stumbling block would likely arise if and when the Greek government defaults on its obligations to the ECB and the additional payments due to the IMF in July. Such a default, on top of the default vis-à-vis the IMF would, in particular, substantially exacerbate the difficulties of agreeing on a timely new bailout agreement with the creditors. Uncertainty would thus, in any case, be very high.

A Different Approach to Greek Debt and Fragile Banks?

If an agreement on a new bailout program cannot be achieved, negotiations might eventually shift toward explicit debt relief. Of course, the reluctance of politicians in creditor countries to move to such a solution would be high. However, acknowledging the reality of Greek insolvency might eventually be unavoidable. The immediate legal issue is that the ECB can itself not provide debt relief due to the prohibition of so-called monetary financing. A potential solution that is being discussed is for the European Stability Mechanism to provide a loan to Greece with which it would repay both the IMF and the ECB, with precise terms to be agreed. This would, in fact, mean that the Eurozone would have become the by far largest external creditor of the Greek government. On top of this loan to the Greek government, the Eurozone might also consider injecting funds to recapitalize and stabilize the Greek banks. However, to repeat, the difficulties of achieving such a solution are considerable, and uncertainty would thus be prolonged in any case.

Euro Exit Not a Given

While we have pointed to the risk that Greece would exit the euro in case of a "no" vote in our previews reports, this may not be an automatic outcome. Essentially this depends, first, on the degree to which the ECB provides ELA to Greek banks. Second, it also depends on the willingness by the Eurozone/EU to provide emergency assistance to the Greek government. But it ultimately depends on the finances of the Greek government itself. If it were to resort to the issuance of IOUs to finance expenditures, this would constitute a first step toward Grexit. However, even such IOU-issuance would not be equivalent to the abolition of the euro as legal tender in Greece. In fact, under EU law leaving the Euro is not possible without leaving the EU itself. Euro exit would thus likely be an informal and, at least on paper, a temporary step.

Fallout for the Eurozone Probably Limited

In summary, a "yes" vote in Greece would, in our view, clearly constitute a vote of confidence in the euro project. It would thus possibly also reduce the risk that political opposition to the euro grows in other countries. On the economic side, it would likely have a slightly positive effect on business confidence and thus on economic activity in the Eurozone. The impact of a "no" vote would, in principle, be the reverse. The precise impact is, however, close to impossible to assess. Given the various mechanisms and institutions which have been created to stabilize the monetary union, in particular the enhanced tools at the disposal of the ECB, we believe the fallout of a "no" would be limited, however.