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While the reports appeared to weigh on the euro and lifted German bunds and the Swiss franc, it merely confirmed what had already been hinted. Last week the IMF formally announced the end of the current program that was to run through Q1 16. Greece's request from another program was what the staff report was addressing.

Reports indicate that the several non-European board members, including Brazil, Canada, and Asia, argued that the IMF's reputation and credibility are at risk. They, along with the staff, see Greece falling short of two requirements needed for another package. First, it does not have the" institutional and political capacity" to implement the economic reforms. This is a concrete way in which Tsipras' distaste for the program and the splintering of the Sryiza coalition is impacting. 

Second, Greece's public debt burden is not sustainable in the medium term. The IMF has been clear that it could not and would not participate in a third assistance program unless there was substantial debt relief. Germany and other creditors refuse to consider debt relief until there is evidence that Greece is implementing the reforms it promised. This was expected to take place in Q4, but an election could delay this further. One idea is that the IMF would re-engage after the debt relief has been granted. 

The great Yankee philosopher Yogi Berra once advised if one reaches a fork in the road one should take it. Tsipras thought there was a fork in the road, that there was an alternative to the creditors' demands. However, he realized that the only alternatives were even worse. Along with former Finance Minister Varoufakis, he resisted recognizing the legitimacy of the Troika. That fork also turned out to be ephemeral. Instead of the Troika, Greece is going to be negotiating with a "quadriga" of the IMF (whether it participates or not in aid), the ECB, the EC, and for the first time, the ESM.

If Syriza holds a referendum Sunday and Tsipras loses it, or even if he barely wins, the risk of a new election will likely weigh on the euro when the markets re-open after the weekend. It would further increase the likelihood that another bridge loan will be needed so Greece can pay the ECB (and to a much lesser extent other creditors, including the IMF) in August.  

The Greek central bank did not request more ELA access this week as the deposits had stabilized. A loss for Tsipras would likely renew uncertainty and anxiety and spur another wave of deposit flight. Although Greece has been given the authority to re-open the stock market, which has been closed for a month, but ring-fencing it to let equity trading take place within the existing capital controls is providing to be quite difficult.

As it turns out, a party referendum may be more significant for the future of Greece than the national referendum earlier this month.

Marc Chandler
Global head of currency strategy at BBH
Marc to Market

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