Greek drama

There is a greater likelihood of a Greek withdrawal from the currency union after the Greeks yesterday voted No to further cuts and austerity. The Greek government and the Greek people still want to keep the euro, but want an easing of austerity and write-downs of the government's gigantic debt. Creditors have so far shown reluctance to go along with any debt write-down, and some European politicians and high-ranking officials have equated the referendum with a vote on the euro.

Over the past week, the Greek government has made it known that negotiations with lenders will continue no matter what the outcome of the referendum. But even if the Greek government's popular mandate may have been strengthened, this has been achieved at the expense of burned bridges with the ruling European leaders, and confidence has fallen to a low. The ability to reach an understanding and thereby agree on a further bailout has thus diminished.

The advantage of an exit now compared to when the Greek crunch erupted in 2011 is that a series of protective barriers have been put in place:
- The ECB has received a carte-blanche mandate and do whatever it takes to achieve price stability. It can therefore buy unlimited numbers of Spanish, Portuguese and Italian government bonds just to push down those countries' borrowing costs and try to control the risk of infection.

- The uncertainty over who will lose out has decreased since the debts have changed hands, from European banks to institutions such as the IMF and the ECB.

- Capital buffers held by European banks are generally higher today. The banking system is better capitalised and is better able to manage any potential bed debt losses.

The only argument against a Grexit is that no one really seems to want one. It will simply cost too much, at least in the short term, both for Greece and for Europe.

In conclusion, we will have to get used to the continued turbulence and risk aversion that will ebb and flow with the continued statements from Greece, the EU, the IMF and the ECB.

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