Greece forced a “bank holiday” until July 6th 2015, as the Greek government has announced a referendum on whether the austerity measures demanded by Greece’s creditors in return for continued financial aid should be accepted or not.  Along with the bank closures, daily limits on cash withdrawals have been limited to 60 euros per day, and a halt on foreign transfers of cash have been implemented in an effort to prevent a mass run on Greek assets.

Predictably, the Eurozone equity market dropped by nearly 3% on the open Monday morning.

So, what are they voting on in the referendum?

While the literal wording will address the government acceptance or refusal of creditors’ terms, in reality, the referendum will be a vote on: a) whether the current government remains intact, and b) whether Greece should begin its exit from the Eurozone sooner rather than later.  Recent polls have suggested that the majority of Greek voters would prefer that negotiations continue to avoid departure from the euro, but the wording of the referendum may centre focus on the prerequisite pension reductions and even harsher austerity measures, prompting an emotional “no” which would all but seal Greece’s accelerated departure from the Eurozone.

What happens next?

In the event of a “no” vote, market volatility will certainly increase, pushing quality yields even tighter, and credit spreads wider, particularly among peripheral Eurozone sovereign bonds. The degree to which this happens will be determined by the European Central Bank’s (ECB’s) follow-through on their commitment to mitigate any possible financial market contagion, having adopted a familiar “by any means necessary” stance.

Conversely, a “yes” vote would almost certainly result in a rapid reversal of sentiment and markets in the shorter term, with sustained financial aid keeping the Greek economy afloat for a while longer.  Politically, one would expect some sort of reshuffling of the government, with either resignations, elections, or some other sequence of events that would essentially remove the current majority government.

How could your investment portfolio be affected?

The primary impact of all of this has been the increased volatility felt throughout financial markets.  Economically speaking however, the impact of Greece’s default and Eurozone departure is limited relative to the global economy, and in the medium term may in fact lead to positive sentiment among European investors. In the longer term however, with the precedent of a troubled Eurozone member departing, it may bring into question the possibility of a “domino” effect in the future.

Among the various macroeconomic and geopolitical risks that exist today, Greece remains a minor factor.  It has been well documented that the financial impact of a default is manageable on a larger scale, although companies and smaller emerging European countries with larger exposure to commerce with Greece will certainly be affected.  From a silver lining view, equity markets may in fact welcome a Greek tragedy as it would almost certainly guarantee a continuation of loose monetary policy from the ECB and U.S. Federal Reserve as global financial markets digest the news.  “Lower rates for longer” has been a driving force behind equity returns, and removal of Greek uncertainty should almost certainly be seen as a positive.

Given the uncertainty of the referendum’s outcome and the short timeframe until its conclusion, trying to adjust asset allocation of a global portfolio to capitalize on the results would be pure speculation.   Over a 12 month horizon, fundamentals of Eurozone economies and equities remain attractive.

Ongoing Monitoring

The “noise” related to Greece has been closely monitored over the past several months by managers. As new developments present themselves, we will continue to update you.