The weekend’s referendum in Greece resulted in a victory for the “No” vote with approximately 60% of voters opposing the acceptance of the conditions attached to loan bailout offers from creditors. Greek banks remain closed and Greece remains in arrears on its 30 June €1.5 billion payment to the International Monetary Fund. The vote has created additional uncertainty on financial markets and share markets have reacted negatively to the news.
What will happen next?
Head of Investment Strategy and Chief Economist for AMP Capital, Dr. Shane Oliver, suggests there a three broad potential implications of the referendum outcome as follows:
– Back to the negotiating table for a deal. This is not impossible, with worsening bank related chaos in Greece providing an incentive for Greece to reach some sort of agreement. So back to the negotiating table is likely to be the first (at least attempted) step.
– Greece continuing to default with a €3.5 billion payment to the European Central Bank (ECB) on July 20 but remaining in the euro. Just because Greece defaults, it would not automatically mean that it will leave the euro. Much would depend on how supportive the ECB will be of Greek banks. But in the absence of any prospect of a deal and growing bank insolvency risk support is likely to be cut off, particularly once Greece defaults on its 20 July payment to the ECB.
– Exit the euro (Grexit). In order to avoid even more aggressive austerity and support its banks Greece will likely decide at some point that it needs to start printing its own money (which would probably have a value 50% below that of the euro). Since it can’t do this in the euro, it would have to exit. This may take several months to unfold and it could be very disorderly and very bad for stability in Greece.
The impact on investors
The “No” vote on the weekend has extended the likely period of uncertainty and volatility on financial markets. However, from an investment perspective we believe that the longer term detrimental impacts of the crisis outside of Greece will be quite limited. The Greek crisis is now nearly six years old and financial markets have had sufficient time to prepare for various scenarios. Part of the preparation has been to shift Greek debt exposure from the private sector to the public sector where the vast bulk Greek debt is now held (i.e. the creditors are institutions such as the ECB, the IMF and other Eurozone governments). This substantially reduces the prospect of contagion across the private global banking system.
Our view remains that the events unfolding in Greece are not a reason to vary longer term investment allocations.
However, please do not hesitate to contact us should you wish to discuss recent market events or any aspect of your investment strategy.
