In “Beggar Thy Neighbor? Greece’s Battered Banks Beget Balkan Jitters” and then again in “Fearing Spillover, ECB Moves To Shield Neighboring Banks From Greek Meltdown,” we outlined the potential for the Greek banking sector meltdown to infect Bulgaria, Romania, and Serbia where Greek banks control a substantial percentage of total banking assets. 

Despite the fact that yields on the country’s bonds spiked last Monday following Greece’s “Lehman weekend”, clearly indicating that investors were nervous about a potential knock-on effect, central bankers in the region rushed to their respective soapboxes to ensure the world (and local depositors) that the imposition of capital controls in Greece had no effect in the Balkans. Nevertheless, the contagion risk (at least in terms of bank runs by depositors who either rationally or irrationally fear for their cash) is very real, as noted by Morgan Stanley some two months ago. This was reinforced on Friday when Bloomberg reported that the ECB was moving to provide a backstop for Bulgaria in the event of a panic. 

“It certainly appears as though the whole ‘Greece is contained’ line is yet another example of a vacuous attempt to calm a panicked public by issuing hollow assurances from on high and compelling the media to parrot them to the masses in order to obscure the real risks,” we said. 

Indeed we got still more evidence that Greece does in fact matter this morning when Handelsblatt reported that according to Bundesbank chief Jens Weidmann, a Grexit would reduce the German central bank’s remittances to the finance ministry to zero, at least in the short-term. 

And speaking of pernicious domino effects, we outlined in great detail just what a Grexit would mean for Europe on Saturday in “The Greek Bluff In All Its Glory: Presenting The Grexit ‘Falling Dominoes’".

Now, Greece’s fate in the currency bloc will be decided at the ballot box, which marks a fitting conclusion to the long-running drama that has bankrupted the birthplace of Western civilization. That is, Western democratic ideals emanated from ancient Greece so it’s only right that the fate of the country in the 21st century should be decided by popular vote. But however Greeks vote, there are very real consequences for financial markets across the globe as indicated by the multitude of examples cited above. With just hours to go until Western capital markets begin to react to the referendum results (due to come in sometime after 2pm ET), it’s clear that many asset managers are bracing for extreme volatility. Bloomberg has more: 

It shouldn’t have gotten this far.

That’s the view of equity managers overseeing more than $3.7 trillion, 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 $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 Inc., which oversees $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 percent 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.

“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 percent. A measure of stock swings for the region jumped 21 percent in five days. The Euro Stoxx 50 is now down 10 percent 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 percent in less than six weeks. The crisis contributed to an 11 percent drop in the S&P 500 and a 16 percent plunge in the MSCI All-Country World Index.

“No one knows how to interpret a ‘no’ vote,” said Woehrmann, chief investment officer at Deutsche Asset & Wealth, which manages about $1.25 trillion. 

“There is no blueprint for how a country exits the euro and re-denominates,''said David Lafferty, chief market strategist at Natixis Global Asset Management in Boston. The firm oversees $900 billion. "That’s going to create all kinds of uncertainty in Europe.”

In other words, Greece matters, despite the protestations of media pundits and central bankers.

The idea that a country can simply careen out of the EMU and in the process prove the currency bloc to very much "reversible" thus raising the specter of re-denomination across the periphery without having far-reaching effects is naive in the extreme and represents a dangerously myopic view of capital markets.

One lesson the crisis of 2008 taught was that financial markets are far more interconnected than anyone cared to believe and you know what they say about those who do not learn from the past...