Greece’s banks are on the precipice of failure. The Greek PM’s decision to put everything to a referendum five days after their current bailout program has expired indicates that there is little chance of an eleventh hour deal. As such the ECB emergency loans which are keeping these institutions on artificial respirator are now in grave jeopardy and therefore the deposit flight from Greek banks is likely to accelerate until either the Government declares a bank holiday or capital controls are inserted. The former would be best to save banks from financial failure but have a massive detrimental effect on the economy which would ground to a halt given the closure of the payments system with unemployment certain to increase rapidly. And when do banks re-open?

Only with a pro-bailout referendum, but if the vote goes the other way, that they will have to be wound up and nationalised via government money printing. In contrast, capital controls allow commerce to continue to a limited extent, but is much harder to establish, enforce and monitor and banks need the cash on hand to meet withdrawal demand, which they probably don’t have. And in any event, households precautionary savings will increase and this will depress the economy and force unemployment up which will insert more balance sheet pressure on the banks anyway.

Either way, I can’t see any way back from here unless one side backs down massively and when it comes to playing with fire in relation to bank failures and sovereign default, my old game theory lecturer Professor Varoufakis, who is now Greek finance minister, should know that the only winning move is not to play.

Written by Matt Sherwood

Head of Investment Strategy, Multi Assets