The euro is the loser from Greece

There have been more deadlines than hot mousakas in the saga that is Greece, but the imminent collapse of the banking system means that there’s probably 48 hours at most to keep Greece within the Eurozone, should that be what Europe wants (we’ll probably know more on this before the European open) . There are two reasons to suspect that the chance of a deal being cut is greater than would have been the case a week ago on such a result.

The first is the size of the majority. With more than 60% rejecting the deal, Tsipras has secured a larger mandate than even they expected (Syriza had just under 37% share of the vote at the January election). It’s not just the radical left that have rejected the deal, but a large chunk of Greek society, including conservatives and moderates.

The second is the fact that even the IMF have admitted that the debt burden of Greece remains too sizeable and will have to be cut further in the coming years, with last week’s report suggesting a further EUR 60bln of aid and a doubling of debt maturities. This in itself is moving along the right lines for Greece, but is not the debt forgiveness that ultimately Syriza wants to see.

So the choice facing the creditors in the next 48 hours is fairly simple. They can either retain their demands for a deal that does not involve debt relief (which won’t be accepted) or cede to the will of the Greek people and renege on their ‘red line’ that has been in place since the start of current negotiations. That could see Greece remain in the Eurozone, but would be a huge loss of face. It would result in a wholesale and permanent weakening of the single currency as an entity. The founding principles of no mutualisation of debt (which I talked about last week here) would have been broken so it would be that much harder to say the single currency would be stronger as a result (in form, rather than value).

As for the alternative scenario, it would be messy. Greece would need to introduce a new currency within a matter of days. The physical reality of this would take weeks. The results of the potential legal wrangles over debts (which are revalued, which remain in euros would continue for months, if not years.

For now, the market reaction has been on the muted side. The opening gap lower in the euro was less than seen last Sunday. Whatever the outcome of the next few days, there is no way that the Eurozone or the single currency can come out stronger as a result. The past few months have shown the flaws in the whole system of monetary union and they can’t be put back into the box.