Having won the general election in January with a modest 36% of the votes, the Syriza party had effectively been handed a mandate to keep Greece in the union, so he couldn’t simply walk away from the Monetary Union.
Some of the more cynical market participants have suggested Alexis Tsipras was always gunning for a ‘Grexit’, but he needed to be forced out rather than walk away. This clearly hasn’t played out in that vein, although Eurogroup President Jeroen Dijsselbloem has shown huge frustrations with Greece’s tactics and the relationship between all involved is clearly very poor.
The key for Tsipras, though, has been to alter public opinion enough that further austerity imposed by the creditors in return for funding, is not in the best long-term interests of Greece.
On Wednesday, we saw Alexis Tsipras reaching out to the creditors with a new proposal, suggesting it was the basis for compromise. However, it was nothing more than out-and-out political tactics as he knew full well it would be rejected. Tsipras clearly felt he could strengthen his hand and win over further support from the Greek voters, many of whom feel he genuinely has the Greece's best long-term interests at heart.
Still, we go into this Sunday’s referendum with the market positioned for a positive outcome. Is this view misplaced? With positioning, expectations and price action in mind, here are the four most likely scenarios I feel will play out. I also list markets which could have the strongest reaction to these outcomes.
The vote is reported to take place between 05:00 and 17:00 GMT (02:00 AEST) on Sunday, so we should have a firm idea on the result for Monday’s Asia FX open at (21:00 GMT) 06:00 AEST.
Vote: Yes. The market seems to be positioned in favour of this, giving it a 75% - 80% probability.
If Alexis Tsipras stays on as prime minister with a renewed focus on gaining creditors’ trust and negotiating a deal:
In my view, this is the most market-friendly outcome as it greatly improves the prospect of avoiding default on its private-sector commercial debt payments due between 10-14 July. The much-publicised €3.5 billion bond redemption to the ECB on 20 July could also be funded, which is key.
Market reaction: Look for EUR to find strong buyers, with EUR/JPY likely to see the most aggressive move in the G10 currency bloc. Relief buying should also be seen in US and commodity futures (08:00 AEST), Asian (including Australian) and European equities. Furthermore, we should see spreads between German and Italian bonds narrow, with traders likely to sell volatility (options straddles, EU VIX).
If Alexis Tsipras resigns as leader of the Syriza party, with a technocratic government needed instead:
Given the make-up of the Greek political system, forming a government could be a very messy process and throw markets into a period of confusion. A number of strategists have said this is the most favourable outcome as a technocratic government would naturally increase the prospect of a deal, but will a government be formed in time?
With this in mind, I feel markets will be concerned about the prospect of a missed payment to the ECB on 20 July due to the sheer length of time it could take to form a government.
Market reaction: Expect markets to add risk to portfolios, although this could be tempered by the political uncertainty. In my opinion, the ASX 200 should rally between 0.5% to 1%, with Europe likely to open 2% higher.
Vote: No. The market doesn’t seem to be giving this outcome too much credence, but it absolutely can’t be ruled out.
If Alexis Tsipras gives no clear indication he will use the vote to gain a better deal with the creditors and the markets feel the prospect for a future ‘Grexit’ increases:
This is the worst possible outcome for markets and would throw up huge uncertainties.
Market reaction: Using last Monday’s moves as a guide, I feel EUR/JPY could fall 500 to 600 pips on open, with the JPY in general likely to benefit from the uncertainty. Recall that in periods of uncertainty and volatility, traders flock to currencies associated with a current account surplus. DOW futures could fall 400-500 points, with the ASX 200 potentially opening 3.0% to 3.5% lower. The Italian MIB should see the biggest moves in Europe, potentially seeing a 7-9% fall, with the German DAX not far off.
Look for outperformance from UK assets relative to Europe on this development. Long FTSE, short DAX would be a good trade, in my opinion.
Expect a 150-200 basis-point widening in the spread between German and Italian bond yields.
If Alexis Tsipras uses the vote as a pawn in the negotiating process:
This could lead to initial selling of EURs, US futures and Asian equities, but I wouldn’t be surprised to see shorts being covered as the day rolled on and into European trade. This would depend completely on the rhetoric from both Tsipras and Varoufakis, the key creditor personnel, and whether there was a willingness to negotiate on more favourable terms for Greece. Clearly this development would hand Tsipras a political advantage but will the EU creditor nations react? I am not so sure they will.