The largest Singaporean lender, DBS Bank, said today that the overwhelming Greece vote against austerity measures on Sunday is not a foregone conclusion for its exit from the euro zone.
“Sunday’s referendum pitched as Greece’s decision to remain or leave the currency union kicked up more dust in its wake. However, despite the over 61 per cent ‘no’ vote, a Grexit is not a foregone conclusion,” DBS Group Economist Radhika Rao said in a report.
Contrary to expectations of a close vote, over 61 per cent Greeks rejected the tough bailout terms proposed by the main creditors through a referendum on Sunday, giving a shot in the arm to the anti-austerity Syriza-led government, the DBS report said.
The report also pointed to the sudden resignation of Finance Minister Yanis Varoufakis, who had many rounds of tough talks with the EU leaders, as a precursor to a compromise solution. Another thaw is the statement by the Greek premier Tsipras soon after the vote that Athens wants to remain in the euro zone, the DBS report stated.
“It’s clear that talks are likely to include some extent of debt recast or write-downs to provide relief to Greek public finances. However, European leaders will be keen to strike a balance on this for fear of setting precedent for other indebted member economies,” the DBS report said.
However, the report also warned that “aggressive rhetoric” by Athens would also lower the EU’s appetite to re-engage with the Greeks. “We reckon that a last-ditch attempt to arrive at a mutually acceptable deal is likely, failing which Grexit will be inevitable,” it added.
In the immediate term, Athens will convene a meeting of its central bank and banks to discuss domestic liquidity situation. Here, ECB’s decision on the emergency liquidity assistance (ELA) for Greek banks will be crucial, the report noted.
“An ECB decision to immediately freeze the emergency liquidity assistance facility will put Greek banks in jeopardy. Other restrictions may include plans to seek deeper hair cuts on Greek bank collaterals, which are at present used to tap the ELA funding line,” it added.
However, the report suggested that an extreme reaction is unlikely for now. ECB is likely to allow Greek banks to access existing funds contingent on another round of talks, but reject calls for an increase in the ceiling.
Stating that the next goalpost for ECB will be 3.5 billion euro repayment due on July 20, the report warned: “If Athens misses that deadline, ECB will have the right to freeze the ELA support and also put Greece in official default. Lack of a bailout deal by then will up the stake for Greece to exit the union.”
Athens is sitting on about 320 billion euros in public debt, 177 per cent of its GDP, which has shrunk over 25 per cent since the crisis began seven years ago.
More than three-fourths of this debt are held by euro-area governments, including the IMF. Though German, French and Italian taxpayers are the most exposed, as a percentage of GDP, it is the smaller EU members like Slovenia, Malta, Spain etc which are also at risk, according to the report.