Paul O’Connor, co-head of multi asset at Henderson Global Investors believes it is difficult, at this stage, to see anything other than a continued deterioration in economic conditions in the country.
Pointing out that the impact on peripheral debt spreads, which he views as a key barometer of contagion has been fairly modest, he said: “Investors will naturally be concerned about the potential risk of financial, economic, and political spillovers into other eurozone countries.
Adding: “The fact that these developments are taking place against the backdrop of a sizeable correction in Chinese equities is far from helpful. Still, while we think that the deteriorating situation in Greece does merit a general lowering of investor risk appetite, we see scope for the ECB to deliver a substantial policy response if economic and market conditions do deteriorate significantly.
Guy Foster, group head of research at Brewin Dolphin is a little more cautious saying that while one cannot take the creditors’ claims that contagion will be contained at face value, “there clearly will have been far more thought put into the potential implications of a Greek exit and default than there had been in advance of Lehman Brother demise.”
According to Foster, most of the quantifiable burden falls on public sector creditors such as the IMF and ECB. Over and above that there are national governments who are exposed through the first and second bailout loans. But, as he says, because the recovery value of those loans would fall if Greece were to leave the monetary union, there is an incentive to keep Greece from exiting.
“The contagious implications are that any creditors to euro denominated cross border loans will be sweating now. German banks have some $13bn of cross border exposure to Greece, with US and UK banks holding similar amounts. Some of this will be secured on euro cashflows so the exposure looks limited overall – particularly in the context of Lehman Brothers nearly $800bn debts. The economy is stronger and the banking system than those dark days,” he added.
