Grexit is not yet what Greece is facing
By Stephanie Flanders, Chief Market Strategist for Europe, J P Morgan Asset Management
Eurozone policy makers may have reached the end of the line with Syriza. With the announcement of a referendum, the Greek people now get to decide whether it’s also the end of the line also for Greek membership of the euro – and investors get to decide whether it matters a great deal to anyone outside Greece.
Greece has a week to consider the terms of a bailout that is no longer even on offer. In the meantime its banks will remain closed and its economy will take another massive hit. On average 59 Greek businesses have closed down every day since the start of the year. This week that number will surely soar.
Investors don’t need to predict what will happen in the vote. They do need to decide how much to care. In the short-term, it’s easy to see why markets have so far only shown sporadic bouts of concern over events in Greece. The European financial system now has much less exposure to Greece than in 2011 and 2012. It is also better equipped to deal with contagion to other countries – and so are the countries themselves.
Even a 1 or 2 percentage point rise in government borrowing costs for Portugal and other periphery economies would still leave interest rates several percentage points lower than they were 3 years ago. And last month’s very supportive judgment from the European Court of Justice gives the ECB ample scope to intervene in bond markets to push those borrowing costs back down, should that be necessary.