AMERIPRISE FINANCIAL, INC.
Does it Matter if Greece Exits the Eurozone?
07/06/2015 | David Joy
The market reaction to the Greek referendum "no" vote has been surprisingly muted, at least so far. In late day trading on Monday across the European exchanges, Eurozone stocks were lower by about 2.0 percent, with the exception of Italy which is experiencing a 3.5 percent selloff. At midday, stocks on the U.S. exchanges are lower by less than 0.4 percent. The German 10-year note yield is lower by just 2 basis points, while Portuguese yields are higher by 24 basis points. Spain and Italy are also higher by 16 and 14 basis points respectively. The U.S. 10-year note yield has fallen by just five basis points, while the Euro has barely budged.
How the Greek crisis plays out remains unclear. The banks are reportedly running out of cash and remain closed. And, the European Union insists Greece needs to propose a way forward, as a large debt payment to the European Central Bank comes due on July 20th. The ECB is meeting Monday afternoon to consider the emergency liquidity facility it has made available to keep the banks afloat, and an EU leader summit has been called for Tuesday. If Greece is to remain in the Eurozone, and that is still a possibility, concessions will have to be made quickly. The banks cannot remain closed indefinitely and expect peace to hold. But who will make concessions? Is it enough for Greece to have voted "no" and verbally pushed back at its creditors? Does that now open the door for broad acceptance of the proposal previously offered, especially with the departure of the antagonistic former Greek finance minister Yanis Varoufakis? Or, does it embolden the Syriza government to dig in and wait for its creditors to blink? And how likely is the EU to offer a more lenient proposal that would only raise questions from previous bailout recipients? Until now the EU has insisted on the implementation of structural reforms before it would consider the question of debt relief. Will it now be willing to package some form of debt relief into a new bailout agreement upfront on faith that reforms will be implemented? For that to happen the EU would have to overlook not only the vitriol surrounding the prior negotiations and the referendum campaign, but also the experience of Greek inaction in the past.
Having voted "no" by such an unexpectedly wide margin, it is understandable that Greece is feeling a surge of nationalistic pride. But, where it leads is uncertain. If the Greek government is now feeling more confident in its negotiating position, it should take a second look at global capital markets and ask itself the meaning of such a surprisingly subdued reaction. It can only be that investors have concluded that it matters little, at least in economic terms, if Greece does exit the Eurozone. Greece better hope that the desire among EU leaders to keep the Eurozone intact for political reasons is a more powerful incentive to finding a solution than are financial concerns.
It is doubtful that any of the players in this saga wants to take the blame for Greece leaving the Eurozone. But if it happens, and Greece reverts to a sharply devalued drachma, the economic hardship that will ensue will likely be painful. Perhaps eventually, with its own currency, Greece can work its way back to growth. But, in a moment of introspection, Greece may also realize that its problems were largely of its own making.
Important Disclosures:
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.
Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.
Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial Services, Inc. Member FINRA and SIPC.
07/06/2015 | David Joy
The market reaction to the Greek referendum "no" vote has been surprisingly muted, at least so far. In late day trading on Monday across the European exchanges, Eurozone stocks were lower by about 2.0 percent, with the exception of Italy which is experiencing a 3.5 percent selloff. At midday, stocks on the U.S. exchanges are lower by less than 0.4 percent. The German 10-year note yield is lower by just 2 basis points, while Portuguese yields are higher by 24 basis points. Spain and Italy are also higher by 16 and 14 basis points respectively. The U.S. 10-year note yield has fallen by just five basis points, while the Euro has barely budged.
How the Greek crisis plays out remains unclear. The banks are reportedly running out of cash and remain closed. And, the European Union insists Greece needs to propose a way forward, as a large debt payment to the European Central Bank comes due on July 20th. The ECB is meeting Monday afternoon to consider the emergency liquidity facility it has made available to keep the banks afloat, and an EU leader summit has been called for Tuesday. If Greece is to remain in the Eurozone, and that is still a possibility, concessions will have to be made quickly. The banks cannot remain closed indefinitely and expect peace to hold. But who will make concessions? Is it enough for Greece to have voted "no" and verbally pushed back at its creditors? Does that now open the door for broad acceptance of the proposal previously offered, especially with the departure of the antagonistic former Greek finance minister Yanis Varoufakis? Or, does it embolden the Syriza government to dig in and wait for its creditors to blink? And how likely is the EU to offer a more lenient proposal that would only raise questions from previous bailout recipients? Until now the EU has insisted on the implementation of structural reforms before it would consider the question of debt relief. Will it now be willing to package some form of debt relief into a new bailout agreement upfront on faith that reforms will be implemented? For that to happen the EU would have to overlook not only the vitriol surrounding the prior negotiations and the referendum campaign, but also the experience of Greek inaction in the past.
Having voted "no" by such an unexpectedly wide margin, it is understandable that Greece is feeling a surge of nationalistic pride. But, where it leads is uncertain. If the Greek government is now feeling more confident in its negotiating position, it should take a second look at global capital markets and ask itself the meaning of such a surprisingly subdued reaction. It can only be that investors have concluded that it matters little, at least in economic terms, if Greece does exit the Eurozone. Greece better hope that the desire among EU leaders to keep the Eurozone intact for political reasons is a more powerful incentive to finding a solution than are financial concerns.
It is doubtful that any of the players in this saga wants to take the blame for Greece leaving the Eurozone. But if it happens, and Greece reverts to a sharply devalued drachma, the economic hardship that will ensue will likely be painful. Perhaps eventually, with its own currency, Greece can work its way back to growth. But, in a moment of introspection, Greece may also realize that its problems were largely of its own making.
Important Disclosures:
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.
Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.
Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial Services, Inc. Member FINRA and SIPC.
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