UBS Sees 40% Chance Of A 'Grexit'

In a report published Sunday, a team of UBS analysts discussed recent developments in Greece, noting that a deal between the country and its creditors was looking "increasingly likely" in recent days, but now the opposite is the case following the government's call for a referendum on July 5.

Greek citizens will be vote on whether they accept the institutions' (fiscal measures) proposals.

According to the analysts, a "yes" vote could ultimately be a positive development for both Europe and the markets and pave the way for a Greek government that is "more amenable to economic reforms." In addition, this could result in more "generous" concessions from creditors. However, the analysts noted that near-term "significant" shock to market expectation raised uncertainty, as well as the probability of an adverse "no" outcome.

Nevertheless, the analysts are placing a "reasonable" 40 percent probability of a "Grexit" (but can be as high as 50 percent) as recent polls put the probability of a "no" vote around 37 percent. The analysts did note that while the probability of a "no" outcome is not likely, it is still technically a possibility.

Related Link: Everything You Need To Know About Greece's Coming Referendum

"There is one key factor that lowers the odds of Grexit down to about 40 percent," the report noted. "According to the relevant studies, the history of polls shows that a change from the status quo leading to worse outcomes for the population tends to be voted down in most cases. In the case of Greece, these worse economic outcomes will be increasingly visible from Monday onwards. The ECB's decision to cap the ELA implies a quick evaporation of liquidity in the banking system. This will likely disrupt day to-day life significantly, limiting domestic payments (wages, pensions etc.), shutting down external payments (for exports etc.), rationing imports over time and disrupting the credit flow leading to private sector defaults."

The report said that a "completely effective" response to prevent "contagion" from Greece would need to be timely, scalable and credible. The analysts stated that they are "relatively" confident that Europe would be able to deliver a "large policy response."

Greek Headlines Has Done Little To Weaken The Euro

The report pointed out that recent Greece headlines has done little to weaken the euro as the EUR/USD pair rose from 1.10 to 1.14 between late May and mid-June. Nevertheless, the analysts suggested that the initial reaction in the currency pair is likely to be negative, although it is difficult to have a high-conviction view.

Outside of the EUR/USD pair, if the referendum results in a "risk-off" move, the Swiss Franc would be the "most likely beneficiary." In addition, the Japanese yen has been viewed as a "risk-off" currency as of late, but the analysts suggested that if there were to be a sell-off in the euro (and a strengthening of the yen), Japanese policymakers will "lean against this."

On the other hand, emerging markets and commodity currencies would also be exposed to a sell-off in risk markets with Australia and New Zealand being the most vulnerable commodity currencies. Higher-yield currencies with current account deficits such as the South African rand, Turkish lira and Brazilian real would be "particularly exposed."