exit-strategy

Greece’s outspoken finance minister has resigned, reports Reuters.

This “remove[s] a major obstacle to any deal to keep Athens in the Eurozone, after Greeks voted resoundingly to back the government in rejecting the austerity terms of a bailout,” explains the report.

Read more on why finance minister Yanis Varoufakis has backed down.

Implications of Greece’s vote

On Sunday, Greeks sided with their government in decisively rejecting further funding in exchange for additional austerity.

But, this story still has one more chapter, says Avery Shenfeld, chief economist with CIBC World Markets, in a recent release.

“European leaders are scheduled to meet Monday to consider how they will respond to Tsipras’ request for a new and more lenient deal than the one last offered. The ECB is the other big player, as it will have to decide if it will extend any further support to Greek’s banks.”

Read: Worried about Grexit? Consider these safe havens

He adds: “Existing rules would deny such support given the plunging financial position of the banks and their available collateral (as their holdings of Greek government debt get marked down). The initial answer from the ECB is highly likely to be negative, leaving Greek banks shuttered.”

Shenfeld says Greece’s last ray of hope is a rethinking by Europe (particularly Germany) and the IMF on what they are prepared to do in terms of meeting Tsipras half way. “Given the last minute rescues we’ve seen since the financial crisis, it’s a mistake to assume that the door to negotiations with Greece has been forever shut, despite the rhetoric in that direction prior to the referendum.”

However, “the odds likely do now tilt that way, and until informed otherwise, markets are likely to assume that Europe will walk away from the table, pushing Greece (as well as many of its financial and corporate institutions that have debt in euros) into default. And without the support of the ECB to refinance the banks, [that] creates a need for Greece  to launch at least a parallel currency, as a first step towards dropping the euro.”

In the near term, Shenfeld predicts, “The outcome for Greece itself will be deeply negative, and even a depreciation under a new currency won’t have as much force at it did for other countries that dropped pegs […] Even tourism is likely to be negatively impacted in the near term given fears of political instability and banking inconveniences.”

Plus, there aren’t any close precedents when it comes to dropping currencies, he adds. “In other cases for new currency launches, the old currency didn’t stick around (whereas euros will still be circulating in Greece). And, unlike cases like the Czech Republic, the issuer of the new currency will start with limited credibility, even at home.

“Greece will recover at some point, and might even end up better off than under the strictest of austerity regimes, but there’s a long road to that long run.”

Investors should also be aware that Spanish elections that are due before year end could produce a similar turn in government towards anti-austerity, warns Shenfeld. “With Spain’s much larger debt, [there’s] a greater risk to regional stability. Peripheral Eurozone debt is likely to see further spread pressure, albeit priced off extremely low and likely falling yields for the safe haven (Germany).

“The no-vote result will be a negative for the euro, as it increases the pressure on the ECB to counter adverse sentiment with an acceleration in the pace of monetary ease through QE.”

On the domestic front, he adds, “The no-vote is also a modest negative for the Canadian dollar, since although Europe’s financial system is now reasonably well insulated from a Greek default, the uncertainties will play out negatively for global growth and, therefore, for commodity exporters.

“Risk assets, including cyclical equities, already priced in some of this news as Greece walked away from the bargaining table. But there’s likely a bit more to come in that direction barring a change of heart by Europe on Monday. These factors also slightly add to the odds that the Bank of Canada will opt for a second rate cut.”

Originally published on Advisor.ca

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