29th June 2015
Stephanie Flanders, chief market strategist for Europe at JP Morgan Asset Management examines the current state of affairs in Greece and looks at what it potentially means for investors…
Eurozone policy makers may have reached the end of the line with Syriza. With the announcement of a referendum, the Greek people now get to decide whether it’s also the end of the line also for Greek membership of the euro – and investors get to decide whether it matters a great deal to anyone outside Greece.
Greece has a week to consider the terms of a bailout that is no longer even on offer. In the meantime its banks will remain closed and its economy will take another massive hit. On average 59 Greek businesses have closed down every day since the start of the year. This week that number will surely soar.
Investors don’t need to predict what will happen in the vote. They do need to decide how much to care. In the short-term, it’s easy to see why markets have so far only shown sporadic bouts of concern over events in Greece. The European financial system now has much less exposure to Greece than in 2011 and 2012. It is also better equipped to deal with contagion to other countries – and so are the countries themselves.
Even a 1 or 2 percentage point rise in government borrowing costs for Portugal and other periphery economies would still leave interest rates several percentage points lower than they were 3 years ago. And last month’s very supportive judgment from the European Court of Justice gives the ECB ample scope to intervene in bond markets to push those borrowing costs back down, should that be necessary.
There was a hint of all this in the ECB Governing Council’s statement on Sunday, following the decision not to raise the ceiling on its liquidity support for Greek banks. It would use “all the instruments available, within its mandate” to respond to the situation, as needed. Put it another way: it will do what it takes.
The more carefully the ECB signposts this support, the less likely it is that it will actually be needed. Or that’s the theory anyway. If and when Greece defaults it will be defaulting on taxpayers – and, potentially, the ECB itself. That raises enormously complicated questions for lawyers and accountants to answer. But investors with minimal exposure to Greek assets and confidence in the ECB’s new tool-kit would be tempted to consider it a non-event. Greece has, after all, been in default on its sovereign debt for roughly 50% of the time since it gained its independence.
All of this suggests that the bulk of the short-term damage from “Grexit” would be felt within Greece itself. But this reassurance comes with two notes of warning.
The first is that long-term damage of a torrid Greek exit could be very significant indeed – politically and financially. The risk premium on Eurozone assets, in times of trouble, will be that much higher, and the room for manouevre in handling future crises will be that much smaller. These costs are incalculable, but that hardly means they can be ignored.
The second, more obvious point to make is that Grexit is not yet what Greece is facing. In fact, it looks reasonably likely that Greek voters will vote to accept the creditors’ terms on Sunday, in order to stay in the single currency – even though the deal is not still formally on the table and the referendum is not formally about keeping the Euro. That will send a clear message to Syriza. If they don’t want Greece to fall out of the single currency by accident, European policy makers will need to decide very quickly what a “yes” vote signals to them.