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Greek debt crisis and where to now?

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Global financial markets are nervously waiting for an outcome from the Greek debt crisis. Greece's June 30 deadline has been and gone, with no deal in sight between Greece and its official creditors. Its previous bailout agreement with the European Union has expired. The big issue for global financial markets now is whether Greece can stay part of the euro currency bloc.

A referendum is scheduled on July 5, where the outcome could very well determine whether Greece stays in the euro or not. Earlier polls suggest that a large majority of Greeks want to stay in the euro, but when the conditions of austerity are attached, support falls.

Further adding to this uncertainty is that the referendum question will not directly address eurozone membership; it will be a question of whether the voter accepts the terms of the bailout agreement set out by Greece's official creditors. If the "no" vote wins, then it is very hard to see a way for Greece to stay in the eurozone. It is not clear if this risk and the potential consequences are fully understood by the Greek public.

Greek crisis continues

Greek Prime Minister Alexis Tsipras seems to believe that Greece can stay in the eurozone despite a "no" vote, which Tsipras and his party are supporting. However, without the support of a bailout deal with the eurozone and no source of funding, the European Central Bank (ECB) could be forced to entirely withdraw its emergency funding support for Greek banks. Greek banks are currently closed and capital controls have been imposed given that the ECB is no longer increasing its level of support. Without the ECB, Greek banks would collapse completely. The Government would have limited means to pay its salaries and pensions. Issuing its own currency would seem like a probable outcome.

A vote for "yes" would appear to be the lesser of two evils. The current Syriza-led government would likely resign and a new government would need to renegotiate a new bailout agreement. The Greek economy will continue to suffer. However, the risk of contagion to other eurozone countries would be limited.

If Greece were to leave the eurozone, it would set a dangerous precedent, indicating membership would be temporary.

Whatever happens on Sunday, it is clear that Greece's troubles are not going away anytime soon, and financial markets will be watching to see what happens in Greece over the next few days.

Janu Chan is senior economist, St George Bank

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