Investment Insight | Greece in focus
With the current situation in Greece remaining fluid, Principal Edge Financial Services Senior Analyst Lex Goldsmith with insights from John Owen, MLC Portfolio Specialist, give their insight into the situation to date, the impact on markets and the importance of remaining patient and not reacting to any larger than usual market movements in the short term.
Greece’s financial and economic difficulties have been ongoing for some years now. However, recent events involving Greece and its European partners have raised the risk of default and possible withdrawal from the Eurozone. Below we have provided a summary of what has happened to date, and how it may affect the markets in the foreseeable future.
What’s happened so far? These are the facts that we know to date:
- The Greek government held a referendum 5th July on the terms of a proposed euro 7.2 billion bailout package.
- The Greek government encouraged its citizens to vote “No”. The ‘No’ vote has prevailed.
- The current debacle is a product of the failure of the two sides to understand each other’s point of view and an unwillingness to compromise. The Eurozone finance ministers refused to extend the current financial assistance agreement (i.e. bailout package) with Greece beyond its 30th June expiry.
- The International Monetary Fund (IMF) has confirmed that a euro 1.6 billion loan repayment due on 30th June has not been repaid. Greece also requested an extension of its repayment obligations.
- Last ditch attempts to broker a deal continue, but the outcome remains uncertain.
- Faced with growing cash withdrawals by Greece’s citizens, the European Central Bank (ECB) will maintain (but not increase at this point) the Emergency Liquidity Assistance to Greek banks. In a bid to contain the risk of a run on Greek banks, Greece’s authorities imposed an extended bank holiday (through at least to the end of this week) and placed low caps on cash withdrawals.
- Prime Minister Tsipras, may have underestimated the difficulty of navigating the referendum both politically and economically. Bank closure places increasing hardship on its citizens and a deflationary shock to a country that is already in depression.
While the chance of another last minute compromise and further negotiations between Greece and its creditors can’t be ruled out, the risk of a default by Greece on all its debt commitments is high, as is the potential for its departure from the Eurozone.
Aside from the euro 1.5 billion loan repayment that is now due, the next crucial date is 20th July when Greece has to make a euro 3.5 billion payment to the ECB. In the absence of an agreement being reached between now and that date, uncertainty will continue and markets are likely to be volatile.
The situation remains fluid, but we are able to make the following observations:
- Greece’s desperate situation is not ‘new news’ and the Eurozone is in a far stronger position to contend with the consequences of default than it was 3-5 years ago. For example, the exposure of European banks to Greece is much lower. The bulk of Greek debt is now publicly owned, including by institutions like the IMF, ECB and European Commission who are in a far stronger position to bear losses in the event of default.
- The economic consequences of a Greek default and possible exit from the Eurozone appear to be very limited, though painful for the Greek population. Greece represents only 2% of euro area GDP and just 0.3% of world GDP.
- The ECB’s aggressive Quantitative Easing (QE) program will help dilute the consequences for the Eurozone should default occur. The ECB can be expected to expand the QE program as required to protect peripheral countries.
- In the event of a Greek exit, the consensus is that there will be limited fallout for the weaker Eurozone nations. However we are aware that monetary unions fail when there is loss of confidence which triggers mass withdrawals from the banks. Depositors need to believe that their country will remain a euro member. A Greek exit would demonstrate that euro membership is not irreversible.
Market volatility will likely persist while the situation remains unresolved. The potential for short term volatility is increased by the lack of liquidity in some markets as investors stand on the sidelines. As is always the case, we suggest:
- You remain patient and do not react to any larger than usual market movements which are likely to prevail in the coming weeks.
- You maintain a diversified portfolio that is representative of your risk tolerance.
- You contact us with any specific or general concerns.
7th July 2015
