Greece: Update and Investor Implications

What happened?

Sunday's referendum culminated in a dramatic rejection by Greek voters of the bailout terms offered in the last deal proposed by Greece's creditors. The scale of the victory of the No camp (62% to 38%) was a surprise given pre-referendum polling showing a much closer outcome.

In Monday's trading, risky assets were down, but the magnitude of the correction was muted. European markets fell by a much smaller percentage than was the case last Monday after the referendum was announced, while peripheral European bonds - Italy, Spain and Portugal - experienced only modest losses. This likely stems from the belief that a deal is still possible and confidence the European Central Bank can manage contagion risk.

What to watch for next?

The most important signpost will be the increasingly fragile Greek banking system which has a rapidly growing liquidity problem. While the ECB is keeping the Greek banks afloat through its ELA (Emergency Liquidity Assistance) program, increasing this is unlikely and even continuity is not guaranteed.

Beyond the banks, the next issue to watch is the response from European officials. Expect more in the next 24 hours as European finance ministers convene.

What if Greece leaves the euro?

The immediate response would be losses in risky assets - equities, high yield bonds and commodities. However the systemic impact would be limited thanks to the efforts of the ECB as well as a recapitalised banking system and the fact there is minimal private sector exposure to Greek bonds. A Greek exit may inhibit European credit growth and Germany and other lender nations would suffer losses from Greece. However, it is important to note most of these losses would be absorbed by public institutions and not private investors.

BlackRock will continue to monitor this fluid situation closely in coming days.