Greece Votes “No” But Uncertainty Continues

July 6, 2015

Greek voters overwhelmingly rejected creditors’ demands for more austerity in exchange for bailout funds, in a referendum on July 5. More than 61% of voters supported Prime Minister Alexis Tsipras’s appeal for a “no” vote. However, what the Greek public voted on was not explicitly around whether or not Greece should stay in the Eurozone, or continue to use the Euro. Rather, Greeks were asked whether or not Greece should accept the current terms and conditions of accessing bailout funds from its creditors. The Greek government has acknowledged that this referendum result does not represent a mandate to break from Europe, and has positioned the result as strengthening Greece’s positioning in further negotiations with its creditors. However, many of Greece’s creditors had indicated already last week that a “no” vote could be considered a vote to leave the Eurozone. Shortly after the referendum, Finance Minister Yanis Varoufakis announced his resignation, in an attempt to ease future negotiations with Greece’s creditors. A replacement will be announced this week.

What has changed?

Despite the celebratory mood in Athens following the referendum results, the reality is that Eurozone membership is in question, and Greek banks are running out of cash and facing the danger of collapse. While Greeks have given their government a directive to negotiate more aggressively for a deal, non-Greek Europeans have not given their governments a mandate to acquiesce to Greek demands. The outcome of the referendum has increased uncertainty around the situation, and likely increased the probability of Greece exiting the Eurozone.

What will happen next?

Everything now hinges on European reaction. Emergency negotiations start again this week with Euro-area leaders meeting in Brussels and conference calls among the European leaders. It remains unclear when Greek banks will re-open; however, some reports have indicated they will remain closed until at least Friday, July 10.

What is MD’s view?

The best and most likely outcome for the Eurozone and financial markets remains a negotiated deal on bailout terms, in particular, ahead of the July 20th date when approximately €3.5 billion of Greek bonds held by the European Central Bank mature. We believe that the contagion risk from the Greek banking sector remains lower than in previous years, as the European Central Bank has additional tools to stem any negative fallout from the situation. The issue remains highly political however, and very uncertain in the near term.

How are MD portfolios and funds positioned?

We continue to have limited direct exposure to Greece’s financial markets. Our six to 24 month view continues to see more upside from developed international equity markets relative to U.S. equity markets. We continue to encourage you to work with your MD Advisor to maintain a portfolio that is aligned to your purpose and time horizon, and well positioned to handle near-term uncertainty related to Greece, or other market activities.

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