Near the end of last week, Greece Parliament voted 178 versus 120 to hold a referendum on July 5th 2015. What will the referendum mean for the current uncertainties?

Near the end of last week, Greece Parliament voted 178 versus 120 to hold a referendum in Sunday, July 5th 2015. The referendum that will decide on whether Greece will accept Eurogroup demeaning proposal or not has greatly surprised the market. What will the referendum means for the current uncertainties?

 

Busted Bubble

Greece debt problem started when it joined the Euro although it originally didn't have enough financial credence to do so. For the next following years after becoming a part of the Euro, Greece was seen as a promising emerging market. By joining the Euro, Greece can easily secure capitals through any means, including debt. However, all of the Greece's goodness was actually merely illusion created by data manipulation. In the end, they used that illusion in order to borrow large amounts of money to build ambitious projects and anything else besides.

Nevertheless, before the aforementioned projects bear fruits, the reality of Greece brokern finance was known due to the skyrocketing deficit and dropping credit rating. In 2010, Greece asked for bailout from three parties: European Union (EU), European Central Bank (ECB), and International Monetary Fund (IMF), that was later known as Troika. Aside of being bailed out, Greece also started to conduct Austerity programs including hiking taxes, cutting wages, and freezing pensions. That year marked the start of bloody demontrations on Greece streets.

Demo

Greece acceptance of Troika's bailout funds marked the start of a vicious cycle in which Greece can only pay their old debt by making new debts while austerity in the country has greatly depressed domestic economy and brought recessions in.

In 2011, Greece creditors agreed on a hair cut, that is to cut 50% of Greece debt. Even so, Greece financial crisis continues with the tax office failure to hunt tax offenders and depressing recessions around. Factories that emerged after Greece joined the Euro now has sank, ambitious projects were discontinued, and unemployment rampants after even the government has laid-off their workers.

Amid all of those crisis, Athens' political scene failed to find a stable ground. Prime Ministers and cabinets, one after another, decided on meaningless policies. Voters who are tired of European yes-mans at last chose to believe in the Left Wing Coalition who are anti-bailout in the January 2015 election. Thus, Alexis Tsipras became Greece's sixth prime minister since Greece debt crisis emerged in 2008. 

Grafiti

Since then, Tsipras and his cabinet's finance minister, Yanis Varoufakis, feature prominently against Troika in deciding Greece's future. Keeping in mind the Greeks suffering due to hight taxes and widespread unemployment, the new government refused Troika's demand for Greece to continue their austerity program in exchange of bailout funds. Meanwhile, Greece's empty coffers made them unable to fulfill the latest debt payment deadline. 

 

Back To Democracy

In Saturday, PM Tsipras announced that they will hold referendum in July 5, 2015 to asks the Greeks whether they are willing to accept Troika's proposal in order to release the much-needed bailout funds or not. If the Greeks says yay, the government will accept it and continue the required austerity program while still be a part of the Euro. Or else, Greece may enter default and be spurred to exit the Euro.

Yunani

The announcement surprised both Greeks and international market. Consequently, queues in ATMs and gas stations filled up in an instant. The Government also put capital control in place, a step to prevent capitals from exiting the country. Not long after, ECB governing council decided to stop raising upper limit of ELA that was previously hiked in Friday. The decision means that Greek banks will no longer have enough liquidity to afford massive withdrawal that has been ongoing since last week. In Saturday alone, around a billion Euros withdrawed while the queues lengthen. Meanwhile, it was decided that Greek banks will be closed starting from 29 June to 7 July.

 

The Risks of A Referendum

It needs to be noted that the deadline for Greek debt payment to IMF is today, June 30. It means that although the referendum may ends with a win for yes camp, the Greece is clearly has failed to fulfill their pledge. Aside of that, it is still doubtful whether Eurogroup proposal for reform in exchange of bailout will still be available even after so far out of the deadline.

Two most recent polls quoted by Greek media ekathimerini mentioned that most respondents want Greece to sign an agreement with their creditors, with yes vote turned out at 57 percent and 47 percent respectively. However, PM Tsipras publicly denounced Europe and is actively supporting the no camp. He blamed the Troika for Greece crisis and mentioned that if the no camp wins then their position in the negotiation will be improved.

But it does not necessarily will happen like that.

In his column in New York Times, economist Paul Krugman revealed the political impications if the yes wins, The troika clearly did a reverse Corleone — they made Tsipras an offer he can’t accept, and presumably did this knowingly. So the ultimatum was, in effect, a move to replace the Greek government.

In other words, the first consequence of the referendum is a junction where Greeks have to decide whether to keep the left-wing coalition (no) or to submit to a new government that presumably will do what Europe want them to do (yes). Any other consequences afterward are still uncertain, but if the current capital control lead to Drachma printing, then Greece probably can already be considered out of the Euro.

 

Trade Amid 'Grisis'

The Greek crisis ('Grisis') drew concerns on EUR-related financial calamity if the Euro drastically moves up or down. Furthermore, initial polls indicated an upcoming fierce battle between yes and no camp. In preparation, several brokers shifted their margin requirements or leverage to reflect raising uncertainties. Along with it, traders need to adjust their money management as well.

Christopher Vecchio from DailyFX underlined the importance of reducing position sizing and leverage on Euro crosses. Although the impact is not yeat measured, but high uncertainties made it impossible for there is no influence. Along with it, Swiss Franc pairs may also not be a good alternative as Swiss National Bank has pledged to do whatever it needs to keep Swissy on the acceptable range.

On the other hand, Danske Bank noted that ECB is also expected to widen their Quantitative Easing measures. Because of that, as quoted by eFXnews, The market will be characterised by a broad risk-off move. In FX markets, the Greek uncertainty should trigger a rally in the usual safe-haven currencies, but it will soon be dominated by expected monetary policy responses.