Greece: No widespread panic after painful weeks
By Pioneer’s Group CIO, Giordano Lombardo
The Greek saga escalated during the weekend, with premier Tsipras calling for a snap referendum. What is next?
Next Sunday, the Greek people will technically be voting on the terms offered by the trio of institutions (European Commission, European Central Bank and the International Monetary Fund) – although it is unclear as of this writing exactly what will still be “on offer” come this weekend.
However, we emphasize that the vote is ultimately about whether Greece is to remain in the common currency (yes) or to pursue “Grexit” (no). As such, at the end of the day, whether Greece remains in or out of the eurozone would be in the hands of the Greeks themselves. We see a positive in this: a clear democratic mandate could help all stakeholders move forward without the political stalemates that have continually stalled the process.
We have many times highlighted that Europe’s fragility results from a Monetary Union crossed with the lack of political integration; the strenuous negotiations of recent days are a clear symptom of it. However, the concrete possibility (even if not the most likely outcome at this stage, in my view) that a country leaves the Eurozone can act as a further stimulus to accelerate the integration. We believe this is a test for the future of the Eurozone, and has far broader implications than for the Hellenic Republic itself.
Recently, S. Fischer, the vice chairman of the Fed’s Board of Governors, said that the relative tightness of the eurozone’s integration is periodically challenged through a series of crisis episodes. He argues that in the end, a more cohesive Europe could emerge along the lines suggested by the recently released “Five Presidents’” report, which charts a course for strengthening the Economic and Monetary Union.
Moreover, the threat of centrifugal forces that, from left to right, are visible in the political debate in Europe could lose some of their popular appeal and impact, given how the European media have depicted the current Greek drama’s impact on the Greek people themselves.
It will be a turbulent week for the Greek people because of the limitations imposed on currency and the closure of banks. This will likely add to the desire to remain part of eurozone – both for Greece and for other peripheral members.
Markets opened today experiencing a bout of volatility and weak equity market, how long it will last?
The result of a Greek referendum is currently unknown, therefore the situation remains binary, with Greece either remaining part of, or chaotically exiting, the Eurozone. Therefore, volatility will no doubt last for a while in financial markets.
However, we believe that there is no reason to panic: the eurozone is much better prepared than four years ago for a crisis event even of this magnitude, with direct exposure to Greek assets being relatively low internationally. Moreover, European institutions – the ECB first and foremost – will smooth as much as possible excessive volatility. The current Quantitative Easing (QE) programme and all the instruments that the ECB added to its toolkit, up to and including OMT (Outright Monetary Transactions), should avoid a widespread contagion impact.