(enikos.gr) — Wall Street is hoping for a “yes” vote when the Greek people vote Sunday on whether to agree to onerous bailout terms from creditors, as a “no” vote would carry with it more serious economic repercussions for the debt-strapped nation and create more uncertainty and turbulence in financial markets.
While a Greek “no” vote, which would all but cut off its financial lifeline from creditors and put the country closer to an exit from the 19-nation eurozone, is not considered aLehman Bros.-like moment. “Greece is not a Lehman moment, it’s more like aRadioShack moment,” says Alan Skrainka, chief investment officer at Cornerstone Wealth Management. The electronics retailer’s bankruptcy earlier this year had no lasting impact on markets. But Lehman’s collapse in the fall of 2008 ushered in the worst financial crisis since the Great Depression.
The general consensus on Wall Street is that the referendum is a key turning point in the crisis. It could either move Greece and its creditors closer to an eventual deal or create even greater confusion as questions over Greece’s place in the eurozone increases exponentially. The Greek people are basically voting on whether they want to accept the onerous terms the creditors demand — such as pension cuts and higher taxes — in order to receive fresh bailout funds.
“A ‘No’ vote is the worst outcome, as the market would view it as increasing the odds of a “Grexit,” which would add to uncertainty,” says Nick Sargen, senior investment advisor forFort Washington Investment Advisors.
In contrast, Skrainka argues, “a ‘Yes’ vote means the Greek government collapses and a new government will be formed, (but it will be) much more favorable for investors because there is a greater chance Greece adheres to the European Union’s demands.”
Skrainka points out that the knee jerk reaction of the market this week after Greek missed a key debt payment due to the International Monetary Fund shows that investors “feel there will be no contagion, and damage is limited to Greece and its creditors.”
Unlike a few years ago, European banks have little exposure to Greek debt, so the Greeks failure to pay back loans from the IMF and the European Central Bank will have a lesser chance of causing a domino effect, Skrainka says. “A Greek default will not take down the European banking system,” he says, adding that Greece is a small country with little impact on the broader European economy.
But no matter what the vote outcome there are still a lot of unknowns and scenarios to consider.
A ‘No’ vote would cause a chain reaction of financial moves that would isolate Greece and basically leave it broke and unable to pay its bills. A ‘No’ vote would likely result in the ECB pulling its emergency funding program to Greece. And that would mean the Greece banking system would collapse because banks would “run out of money.” Losses would be suffered by the IMF, ECB and other creditors.
If the Greeks vote now, investors will likely react in a negative way. “Markets would likely overreact in the short term,” says Skrainka. That was the case Monday when theDow Jones industrial average suffered its worst one-day drop in two years after bailout between the two parties broke off and Greece closed its banks and announced Sunday’s referendum.
If Greeks vote “‘No’ it would produce another leg of a market downturn,” warns Sargen.