Greece going for referendum, more questions arise

Greek Prime Minister Alexis Tsipras announced a surprise referendum on the Greek bailout negotiations, late on Friday night. In a speech that was broadcast live on Greek television, he announced that the referendum would be held on 5 July. Press reports indicate that the Prime Minister promised to abide by the results of the referendum, even as he argued against the terms demanded by Greece's creditors, and asked Greek citizens to say no to more austerity. He also said that he would ask for the Institutions to extend the bail-out program by a week. Other press reports suggest that the Institutions were not informed of the Greek Prime Minister's plan, and presumably had no chance to weigh in or consent. In other words, the ECB, which is keeping the Greek banking system afloat through the Emergency Liquidity Assistance (ELA) as long as negotiations are continuing, had no idea this was coming.

As we digest this news, it is obvious that there are more questions than answers, with many questions in the sphere of Greek politics, not our core area of expertise. For now, find below a short list of the main questions that investors are likely to ask themselves, and answers to some (but not all) of them according to Barclays notes to it clients, based on the current available information.

1) Will there be a deal this weekend?

It seems very unlikely that there will be a deal this weekend, given that the Institutions were unaware that a referendum was coming and were preparing for more negotiations. The only scenario would be if the Institutions were to agree completely to the Greek government's final proposal, which could conceivably allow the Greek government to walk away from the referendum announcement. However, such a public climb-down on the part of the Institutions seems extremely unlikely.

2) Will the Greek government be able to make the June 30 payment to the IMF?

Almost certainly not. It is hard to see how there will be any agreement or aid disbursed in time for the 30 June deadline. We believe the Greek government will miss the deadline.

3) Will the ECB continue to support the Greek banking system next week? In other words, will Greece be forced to declare a bank holiday and capital controls on Monday?

This is a more difficult question to answer. We believe that there is a strong chance of capital controls being imposed in Greece through the ECB increasing haircuts on the ELA it provides the Greek banking system (even though Greek officials expressed confidence on Friday night that Greek banks would open on Monday). The ECB is now supposed to hold a call on Sunday to discuss the ELA but it seems probable that they were not informed, or on board, with this decision by the Greek government. The ECB had continued supporting the Greek banking system over the past few months of deposit flight because of: a) the hope that an agreement would be reached; and b) the assumption that the Greek government will not default on payments. It is unclear if the first argument still holds (since the Institutions were not part of the decision to call for a referendum) and the second clearly doesn't. Several people on the ECB (including the Bundesbank's Weidmann) were already uncomfortable about the ELA increases to Greece; it is very possible that majority opinion on the ECB now shifts to increasing ELA haircuts, though we admit it's a close call.

4) What will be the question asked in the referendum?

The Prime Minister seemed to suggest that the question would be a simple yes/no on whether Greek citizens wanted to accept the creditors' proposals. It seems unlikely that the question will include any discussion of the consequences if Greece votes no.

5) What happens if Greece votes no?

Government officials are currently emphasizing that this is simply a vote on the negotiations and not on the Greek position within the EMU and EU. In reality, the two questions are related. We believe that the odds of a Greek exit increase substantially if Greece votes no. And if capital controls have not been imposed by then, they would almost certainly be after 5 July.

6) What happens if Greece votes yes?

Every indication is that the existing Greek government is opposed to the creditors' current terms. Consequently, it is very possible that in the event of a yes vote, Greece would face a political crisis, with a new government having to be formed in order to finalize the negotiations and implement the agreed-upon reforms.

7) How will financial markets react on Monday?

We have emphasized in the past that the systemic implications of capital controls being imposed in Greece are limited, given the ring-fencing measures put in place by the ECB and Eurozone governments. Regardless, this announcement should be viewed by markets as an escalation. Unless something else changes the dynamic significantly over the weekend, the initial reaction by markets on Mondaywould likely be a flight to quality.