Oxi thoughts

So the Greeks voted Oxi (No) in the referendum on austerity. It was an interesting vote. The citizens were asked to vote on a set of proposals that were no longer on the table (indeed they were a draft not even approved by the eurogroup). It was a way for the greeks to express anger. Ok, so be it.

What happens now?

First, the ECB will have to decide if it wants to continue funding Greek banks. With bonds trading at around a third of face value, prudence suggests the haircut on Greek debt should be increased. That alone will cause many banks to go bankrupt. ECB cannot lend to insolvent counterparties. You get the point.

Next, assuming the status quo on ECB, banks will run out of currency in a matter of days. The fiscal math has gotten terrible recently and the primary surplus has vanished. The government will probably have to resort to issuing IOUs as a stop gap till a new currency can be printed. In the next 3-6 months a new drachma has to be introduced. It will probably trade at a big discount to the euro.

If that is the path taken, Greece will have exited Euro membership. Technically membership of the EU is contingent on euro membership, so they could exit the EU as well. This has the additional implication that they need to start having border controls, new visa system (that could have a big impact on tourism), etc.

The geopolitical implications of EU-exit can be very large:

Turkey could be a big beneficiary and be able to join the EU.

Russia could get a foothold as it could be seen as a savior, lending money when no one else would.

Lastly Greece has an oversized defense budget relative to the rest of Europe. It is a recent democracy and civil institutions are badly developed (note the poor tax collection as an example). In a very bad outcome scenario a military coup cannot be ruled out, especially one backed by Russia.

This will be interesting to watch from outside. Very bad for the greeks themselves.

Some links. I’ll try and keep adding more here.

http://mobile.breakingviews.com/storypage/story.aspx?story=21206656

 

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