Toby Nangle, head of asset allocation at Columbia Threadneedle Investments, for example, said he was surprised the moves seen in markets on Monday were so modest, arguing that market participants are overly optimistic in their assessment of a favourable outcome.
For Nangle, and for a number of other commentators, the banking sector holds the key in the short term.
Greek banks have continued to function as a result of the Emergency Liquidity Assistance being provided by the European Central Bank. On the announcement of the referendum, this ELA was frozen and toward the end of the week there were reports of ATMS running out of cash. The problem is now that if Greece defaults on its bonds that come due on 20 July, the ECB will have no choice but to declare the banks insolvent and cancel the ELA.
“Time is of the essence if de facto ejection from the euro is to be avoided,” Nangle says, adding: “Now that the last Greek programme has expired, a new programme would need to be approved by European parliaments before coming into existence – including the German Bundestag which has been dissolved for its summer break. Greek negotiators have insisted that any deal should include debt relief, but this does not at this time appear likely to pass to a variety of eurozone members’ parliaments.”
Aviva’s base case is that the Greek government will default on 20 July and because the ELA will be cut off as a result, the government will have to circulate a secondary currency, which, he says, will reduce exponentially the prospect that Greece will continue to be a full member of the eurozone.
Eric Lascelles, chief economist at RBC Global Asset Management is similarly pessimistic, saying the firm has raised its probability that Greece will fail to secure a bailout to 60%, the first time it has believed there is a greater likelihood of failure than of success.
“A clear pattern is emerging for Greece,” Lascalles said on Monday, “at every juncture over the past eight months, the worst of the available paths has been selected…Given all of this, it seems wise to budget for yet another disappointment – namely, a failure to strike a bailout over the coming weeks, then likely a eurozone exit sometime thereafter.”
However, while the prospects for Greece look murky, at best, most commentators seem a great deal more sanguine about the prospects for the rest of the periphery, irrespective of what happens to Greece.
Valentijn van Nieuwenhuijzen, head of multi asset, at NN Investment Partners says the firm remains convinced that the ECB is willing and able to limit lasting damage from short-term contagion into other European markets, especially since it is now operating against backdrop of a more unified political front in all of the other member states of the Eurozone that will allow for effective political support for creative policy action, if needed.”
This means, he adds, that while significant declines in both peripheral bonds and European equities as well as further falls in the euro against other currencies can’t be ruled out in the next few weeks, the risk of a break-up of the European Union remains very small.
“As long as the global cycle remains on track, the upcoming period of market volatility might provide an entry point for investors once visibility on the future direction for Greece increases and the accompanying policy response is clear,” he said.
