Markets were relatively calm on Monday following the strong ‘No’ vote in Sunday’s referendum in Greece. The terms of the latest bailout proposal put forward by Greece’s creditors was rejected by a wide margin of 61.3%, which took Eurozone leaders by surprise.
In a further development, the Greek finance minister, Yanis Varoufakis, resigned from his post as a move designed to smoothen negotiation efforts with the country’s creditors following weeks of acrimonious exchanges between Varoufakis and senior figures from the so-called Troika.
The immediate impact of the referendum outcome on the markets was not that of panic as many had feared. Losses both on the currency and equity markets were limited with the euro falling by 1% against the dollar. After touching a low of 1.0968 on its open in Asian trading, it steadily recovered to climb to 1.1052 by mid-European session. Shares in Europe opened around 2% lower but later halved their losses, though many banking stocks were still down by over 3%.
More worrying has been the rise in periphery Eurozone government bonds yields. Greek 10-year government bonds yields are up by 240 basis points to 17.254%, while Spanish, Portuguese and Italian bond yields are all up by around 4%. German 10-year bund yields, in contrast, have fallen by 5 basis points to 0.749% due to its low-risk appeal.
The immediate concern for the Greek economy remains the state of the banking sector where banks have remained shut for the past week since the announcement of the referendum. With all the local banks fast running out of cash and restrictions on overseas transfers, the Greek economy is in a state of freeze with reports of food and medical supplies starting to run out.
The European Central Bank’s next move will be vital to how the situation with both the banks and the negotiations plays out. The ECB’s governing council is due to hold a conference call later on Monday to discuss whether or not any changes should be made to the support currently being provided to Greek banks. It’s unlikely the central bank will raise the cap on the emergency liquidity assistance but they’re not likely to withdraw support either while negotiations between the two sides are still ongoing. However, without any additional support, Greek banks run the risk of being forced to lower the daily limit on ATM withdrawals as well as placing other restrictions.
Talks scheduled in the afternoon between Germany’s Angela Merkel and the French President Francois Hollande should set the tone for Tuesday’s emergency summit between Eurozone leaders. Progress in the talks is crucial if Greece is to avert a total collapse of the banking sector.
Agreement needs to be reached before July 20, which is the deadline for repaying €3.5 billion to the ECB. Christian Noyer, a governing member of the ECB, was quoted today as saying that the debts due to the ECB cannot be restructured as this would amount to direct financing of a Eurozone government. Without a deal, Greece won’t have the necessary funds to make the payment, leading the ECB to cut off ELA support and potentially forcing the Bank of Greece to print its own currency.
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