Holborn Assets Reviews: What Next for Greece and the Markets?

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Greece has been dominating the news again and from the various statements of top European politicians, it is obvious that the crisis has got more serious than ever before.  Some are talking about the Eurozone itself, or even the very idea of European integration, being in danger.  “Grexit” (Greece leaving the Eurozone) is no longer considered a weird conspiracy. On Wednesday Jean-Claude Juncker, the President of the European Commission, said they (the Commission) “had a Grexit scenario prepared in detail”.

What Has Changed in the Last Days?
The main problem at the moment is that Greece needs additional money to avoid defaulting on its debt (that is nothing new) and its creditors are not willing to provide new rescue funds unless Greece agrees with implementing further reforms to help balance its finances and make the economy more competitive.

The change, put very simply, is that “Germany lost patience” with the Greek government, particularly after the controversial 5 July referendum, where the Greeks voted against accepting new creditors’ bailout terms (after their government recommended them to vote so).  But Germany and Angela Merkel, while being the most visible counter-party to Greece in these endless negotiations, are far from being alone.  In fact, an increasing number of European countries are becoming increasingly reluctant to provide more rescue funds to the Greeks, as their leaders are being pressured by public opinion.  Poorer Eastern European countries like Slovakia don’t want to keep contributing to Greek salaries, pensions and benefits, which are generally much higher than their own.  Countries which had to implement painful measures to overcome their own crises, like Portugal or Ireland, don’t like the idea of Greece getting softer treatment just because of the (perceived or real) Greek irresponsibility.  There are still some key politicians (such as French President Hollande) who favour a more constructive or softer approach to the Greeks, but their voice seems to become weaker and more isolated with every passing day.

Why the ECB Is the Key and 20 July Is the Real Deadline
Even more importantly, the European Central Bank (ECB) claims that it may be unable to continue providing sufficient liquidity to Greek banks, because the size and risks of these operations are overstretched even at current levels.  Greek banks have suffered from extremely high levels of withdrawals and many have closed in the last few days (with €60 a day cap on ATM withdrawals), further paralyzing the Greek economy (at the worst possible time – the summer tourist season).  Given the complete loss of confidence, bank runs are feared and therefore the banks are unlikely to reopen before either a solution (new rescue deal) is found or the country actually exits the Eurozone and introduces a new currency.

On 30 June Greece became the first developed country to fail to make a loan repayment (€1.6bn) to the International Monetary Fund (IMF).  However, it is widely believed that the real problem would be a failure to pay the next €3.5bn to the ECB, due on 20 July, because that may be the trigger for the ECB to stop supporting Greek banks, causing a meltdown of the Greek financial sector and most likely the actual exit from the Eurozone.

Effects on the Financial Markets
In the next days the financial markets (stocks, European credit, the euro and risk assets in general) should react favourably to any hints of a deal, but may grow increasingly nervous (i.e. volatile) as we get closer to 20 July.  Of course, no one (not even the Greek government or the European politicians themselves) can predict what the eventual outcome will be and the situation is now changing every day, as new meetings and press conferences are being announced and many of the key figures have quite active Twitter accounts.

Opinions vary on the potential impact of a Grexit on the financial markets and institutions outside the Eurozone.  Some compare the possible outcome to the days and weeks following Lehman Brothers bankruptcy in 2008, while other experts argue that the current Greek problem is fairly isolated and even European banks are much better prepared for a Greek default and Grexit now than they were a few years ago.  In the medium to long term, the Eurozone could actually benefit if its problem child is gone and the euro exchange rate could appreciate against other currencies. But the only certainty is that no one knows until it happens.

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