I am now getting very wary about going on holidays because invariably markets hit a rough patch whenever I do. That has certainly been the case over the past week with both a sharp pull back in Chinese shares and an intensification of uncertainty regarding Greece.

Two weeks ago it looked like Greece was heading for a deal with its creditors. Then at the last minute Greece’s Prime Minister, Alexis Tsipras, decided he didn’t like what was on offer from the Eurozone, the IMF and the ECB and called a referendum on it. This has seen Greece miss a June 30 €1.5bn payment to the IMF (which the IMF so far has called being in “arrears” albeit a declaration of “default” is likely by the end of July) and its banks shut with limits on ATM withdrawals (as Greeks have naturally been taking their money out for fear their deposits will be redenominated into a less valuable currency than the Euro) and on the verge of insolvency if something is not resolved soon.

The referendum has now been held and the No vote has won, with roughly a 60% of the vote. This note provides an update on what it means and the key things to focus on regarding Greece.

Implications of the No vote

The No vote means significantly increased uncertainty around Greece. At a high level it either means:

So the No vote means a worsening chaos for Greece and more Greek related uncertainty for global markets.

What really matters

The bottom line is that uncertainty around Greece is set to drag on for a while. But while the plight of Greece is terrible there are several reasons not to be too alarmed in terms of the global implications.

First, Greece is a very small economy that has been getting even smaller. It’s just 0.25% of global GDP, it takes just 0.5% of Eurozone countries’ exports and it’s a trivial market for Australian exports. So the direct impact on the Eurozone, the global economy and Australia is virtually non-existent. Rather the relevance comes via Greece’s membership of the Eurozone common currency and its potential to de-stabilise it. On this front the threat is substantially reduced from several years ago – see the next few points.

Second, the Greek crisis is now nearly six years old and private exposure to Greek public debt is now very low at just €50bn, with 80% of Greek public debt held by the IMF, the rest of the Eurozone and the ECB. Similarly the exposure of the global banking system to Greece is now low having fallen from $US300bn in 2008 to $US54bn last year. So the exposure and risks are well known with the result that a GFC/Lehman style shock – where global lending markets seize up as financial organisations worry about counterparty risk – is unlikely.

Third, other vulnerable Eurozone countries – namely Portugal, Ireland, Spain and Italy – are all now in much better shape than was the case when Greece triggered the Eurozone sovereign debt crisis over the 2010-12 period:

Source: IMF, AMP Capital


Fourth, defence mechanisms to support troubled Eurozone countries are now much stronger than was the case in 2010-12 and investors are aware of this. This includes: a strong bailout fund (the European Stability Mechanism or ESM); the provision of cheap ECB funding for banks via TLTRO (targeted long term refinancing operations); a banking union and recapitalised banks; the ECB’s quantitative easing program which entails €60bn/month in debt purchases; the ECB’s Outright Monetary Transactions program which can be used to buy individual country bonds which backs up ECB President Mario Draghi’s commitment to do “whatever it takes” to preserve the Euro; and the threat the ECB might use “new instruments” if needed. All this should help keep bond yields in peripheral countries from being pushed too far above levels in Germany.

Finally, the economic and financial chaos that Greece has descended into will likely turn voters off supporting anti-austerity parties promising easy salvation in other countries. Most relevant in this regard is left wing Podemos in Spain given that Spain has a general election due at year end. In fact, support for Podemos peaked late last year.

The last three points mean that there is a much reduced chance that a Greek default and eventual exit from the Euro will prompt investors to look for other countries that may do the same – and so cause an excessive blowout in their bond yields.

In fact it increasingly looks like Greece is “the odd man out” in Europe so to speak. It set the wheels in motion of the Eurozone sovereign debt crisis in 2009, it triggered each of the crises that unfolded in 2010, 2011 and 2012, it has not been able to sustainably tap back into international debt markets unlike Portugal and Ireland and despite Herculean efforts has not been able to come through a mix of austerity and reforms without major political ructions unlike several other Eurozone countries. As such, it should really be seen as a special case.

Consistent with this – along with the improvement seen in other peripheral countries and the strengthening of defence mechanisms against contagion – it is noteworthy that the latest Greek crisis has not triggered anything like the financial market ructions in other peripheral countries seen through 2010-12:


Ten year bond yields, now and then

Country Current Level Eurozone crisis high (low in Ger)
Spain 2.20% 7.51% (July 2012)
Italy 2.24% 7.20% (Nov 2011)
Portugal 2.91% 15.82% (Jan 2012)
Germany 0.79% 1.17% (July 2012)

Source: Bloomberg, AMP Capital


So while Greek related risk has further to play out and a Grexit would not set a good precedent as other countries could do the same (mind you I always thought they could if they really wanted to!), the probability of Greece causing a major crisis in Europe that threatens the global economy and financial markets appears to be low. As the Greece saga drags on investment markets will likely just get used to it as they have with the Ukraine conflict since early last year. If (or when) it does finally come down to a Grexit investors may just celebrate as the long running thorn in the side of the Eurozone is finally gone. So just bear that in mind next time you see the endless footage of understandably concerned Greeks lining up at their ATMs.

So what does this mean for investors?

First, Greece will likely cause more short term volatility in markets.

Second, investors should keep an eye out for the opportunities this throws up – notably in peripheral Eurozone country bonds and Eurozone shares, which on our analysis remain cheap.

Source: Bloomberg, AMP Capital

Finally, while global and Australian shares have been undergoing a correction, partly due to Greece, the Greek drama is unlikely to derail their broad rising trend.

About the Author

Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital is responsible for AMP Capital's diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.

Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.