Why a Greek Default Would Not Spell Doom for Markets

Global markets are entering another period of uncertainty in the coming week. Greece is back in the spotlight…if it ever left. Markets are feeling the jitters ahead of a crucial period in which Greece’s fate in the Eurozone could be decided. But the severity of a ‘Grexit’ may be overstated.

The next €300 million loan repayment is due to the IMF by Friday. Any sign that Greece will default on that loan will have ramifications for global markets.

But as Markets and Money’s Greg Canavan explains, this may not be the disaster it might once have been.

We’ll see if this charade lending and repayment continues. The €1.6 billion owed to the IMF falls due in four separate instalments from 5 June to 19 June. The problem for Greece now is that its default threats are no longer as big a concern as they once were.

Because the IMF and European Central Bank hold nearly all Greek debt, the market no longer sees a Greek default as a risk to the financial system.

That means the dangers of a Grexit will be largely confined to European markets. Last week the US S&P 500 barely flinched at the news that a deal might be unlikely, losing only 0.9% in the week. While the fiasco remains a worry for global markets, the threats of a Grexit are less threatening than they once were.

Why Greece may be lying about an imminent deal
Last Wednesday, European markets were buoyed when Greek prime minister Alex Tsipras said he was optimistic about a deal. That would allow Greece to access the remaining €7.2 billion in bailout funds from its creditors. European markets rose by 2% on the announcement.

But Greece may have been overstating the likelihood of a deal to avoid a run on the banks. A run on the banks is a real concern for Greece for a key reason. Banks need liquidity — provided by deposits — to keep lending. European Central Bank figures showed that Greek deposits fell to €139.36 billion in April — the worst level in over a decade. In contrast, banks held €170 billion worth of deposits on five months ago.

That explains why Tsipras misled the market about an imminent deal. But he was caught out by German finance minister, Wolfgang Schauble. Schauble disagree that any deal with creditors was forthcoming. Adding more pressure on Tsipras, IMF head Christine Lagarde chimed in saying that a ‘Grexit’ was a possibility.

That caused Germany’s DAX to drop by 3.8% by the end of last week. French markets fell too, with the CAC losing 2.6% of its value.

We’ll have a better idea for how European markets will fare during the course of the week. It’s likely that any negative sentiment will see markets shed more of their value.

But with the future of the Euro secure, a Grexit won’t result in the end of the currency. That just means that its effect on global market will be limited. At worst, it won’t send the shockwaves that it might have once.

Mat Spasic,
Contributor, Markets and Money

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PS: Greg Canavan is one of Australia’s leading investment analysts. As a regular guest on CNBC and Sky Business, Greg has been eager to share his successful investment philosophies with Aussie investors for decades.

Just like Greece, Australia has its own financial uncertainty to look forward to this year. Greg thinks we’re on the path to a recession and that it will hit us by the end of the year.

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Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

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