NEW YORK (Bloomberg) - It shouldn't have gotten this far.
That's the view of equity managers overseeing more than US$3.7 trillion (S$5 billion), who say the game of chicken between Greek Prime Minister Alexis Tsipras and creditors threatens lasting damage to a European stock rally that earlier in 2015 added as much as US$2.17 trillion to share prices.
"The market right now hasn't priced in a potential 'no' vote," said David Joy, the Boston-based chief market strategist at Ameriprise Financial, which oversees US$815 billion.
"If we get one, we're going to see another round of downside volatility in excess of what we saw on Monday. The move would be more violent."
The Euro Stoxx 50 Index tumbled 4.2 per cent on June 29 and the Standard & Poor's 500 Index had its biggest plunge in more than a year after Tsipras unexpectedly called for a referendum on austerity measures proposed by Greece's creditors. Concern the vote may bring the nation one step closer to an exit from the euro pushed equity volatility to a three-year high.
A poll commissioned by Bloomberg News last Friday showed that 43 per cent of Greek citizens intend to vote against accepting austerity conditions and 42.5 per cent to back a "yes".
While support for the rejection declined from 52 per cent a week ago, the crisis in Greece underscores the limitations of the European Central Bank's efforts to shore up confidence in the currency union and contain the risk of contagion to other countries in the region.
Credit Suisse Group estimated that the probability of Greece leaving the euro would be 75 per cent with a "no" vote, according to a note on Friday.
"It would raise the question of the solidarity of the European Monetary Union," Joy said. "If all of a sudden one member leaves, it does creates a precedent, and maybe suddenly casts some doubt on the long-term future of the monetary union."
Stocks in Spain and Italy took the biggest hits in the week following the referendum announcement, dropping the most among developed markets with losses of more than 5 per cent.
A measure of stock swings for the region jumped 21 per cent in five days. The Euro Stoxx 50 is now down 10 per cent from a seven-year high in April.
So far, the market reaction hasn't been as bad as in 2010, when Greece received its first bailout. That year, the gauge tracking 50 blue-chip companies in the euro area tumbled as much as 17 per cent in less than six weeks.
The crisis contributed to an 11 per cent drop in the S&P 500 and a 16 per cent plunge in the MSCI All-Country World Index.
Goldman Sachs Group said in a July 2 report that equity volatility caused by a rejection of the bailout terms will be short-lived as the ECB intervenes, allowing investors to refocus on Europe's economic fundamentals.
A "no," which Syriza's leader has been campaigning for, could trigger a decline in the Euro Stoxx 50 to 3,150, or 8.5 percent below where it closed Friday, strategists at the New York-based bank wrote.
That's a scenario that should spur investors to buy Italian, Spanish and German equities, they said.
Acceptance could send the gauge back up to 3,830, near where it traded at the April peak, according to the note.
A rejection of the bailout may not help Tsipras's hand in negotiations, said Asoka Woehrmann of Deutsche Asset & Wealth Management Investment in Luxembourg.
"No one knows how to interpret a 'no' vote," said Woehrmann, chief investment officer at Deutsche Asset & Wealth, which manages about US$1.25 trillion. "I doubt that a 'no' vote will soften the institutions' tone," he said of creditors. "This was the very last trump card Syriza could play."
Many Mistakes It's because of mistakes from both sides that the situation spiraled into such a deadlock, according to David Kelly of JPMorgan Funds, which oversees $800 billion.
If voters turn down the bailout terms, Greece wouldn't leave the euro immediately but may begin to print its own currency to keep its financial system afloat. The country might soon run out of cash and be unable to make a 3.5 billion euro (S$5.2 billion) bond payment to the ECB due on July 20. The central bank would then withdraw emergency liquidity to Greek lenders, and the probability of the country leaving the euro would climb even higher, Credit Suisse said.
"The problem is this is unchartered territory," said David Lafferty, chief market strategist at Natixis Global Asset Management in Boston. "There is no blueprint for how a country exits the euro and redenominates. That's going to create all kinds of uncertainty in Europe."