End game theory

Greek "No" vote means ECB can no longer sit on fence

The Greek "No" vote means euro zone chiefs have a seismic call to make. With over half the votes counted, a Sunday referendum on whether Greeks should accept a new bailout from their official creditors suggests 61 per cent of the populace say "No". Given this is a de facto rejection of the euro zone, European authorities now have to make two critical decisions.

First, the European Central Bank (ECB) has to decide whether to stand by the euro 89 billion of emergency loans to the Greek banking sector. Now that Greeks have rejected the strictures of reforms that are the quid pro quo of such assistance, continued support is politically very difficult. An immediate turning off of so-called emergency liquidity assistance (ELA) would mean Greece's four big banks go bust, perhaps as soon as Monday.

Read more from our special coverage on "GREECE CRISIS"

• Why Indian markets remained unscathed by Greece
• After 'No' vote, come up with serious proposals: France to Greece
• Govt says India insulated from Greece fallout; rupee may get hit
• Tsipras says Greeks were 'brave' in rejecting bailout referendum
• Top 10 debtor countries owe 86% of total IMF loans

The second major call is for euro zone heads of state. Greek Prime Minister Alexis Tsipras, who campaigned for a "No" vote, may now ask creditors for a new deal. If Tsipras were to offer meaningful reforms of pensions and taxation in return for debt relief, Europe's ministers would have to consider it. Without another bailout Athens will soon run out of cash to pay salaries and pensions. And that would force Athens to print an alternative currency to meet payments and preserve the banking system. Greece could then be forced out of the single currency.

The euro authorities in theory have ways to defuse the situation. They could limit any increases to haircuts on Greek ELA collateral to a level that doesn't bust the banks. But that will be tricky, especially as the ECB now supervises the banks and should know all their problems.

Given the difficulties of reaching any deal, markets are likely to fear the worst. Greece is small, at only two per cent of euro zone GDP. But the ECB will need to widen its recently approved quantitative easing programme, and announce new debt protocols that involve risk-sharing between member states. That might reassure markets in the short term. But much more will be required to fix Greek banks - and the increasingly fragile euro zone.