Greek euro exit pending, says Threadneedle’s Mark Burgess
The worsening debt situation in the eurozone means that Threadneedle increasingly views Greece leaving the currency union as the most likely outcome.
As we have said before, Europe is in crisis and the issue is increasingly becoming ‘what is the least bad outcome?’.
Peripheral Europe, and Greece in particular is saddled with too much debt, recession and an uncompetitive exchange rate and faces a range of extremely unattractive outcomes. Even if the German public can be persuaded to write a big cheque (and that is a very big if), it is not obvious that the Greeks could be persuaded to take the money and pay the economic consequences in terms of the fiscal rules that would be imposed upon them. Moreover, it would not address the issue of competitiveness, which would only be improved by a very significant fall in Greek living standards; i.e. a prolonged Greek recession/depression.
Consequently we are increasingly of the view that Greece will exit the Euro. This is going to be an extremely painful event, similar to the European financial system experiencing a heart attack. The question is, is it done in a coordinated fashion, accompanied by a state funded recapitalising of the banking system, a cut in rates, and a massive injection of liquidity, or is it uncoordinated?
If it is the former then it is potentially positive and markets can ultimately move on and move forward. It would also act as a catalyst for Italy and Spain to properly address their deficits. For Greece it would be an extremely unpleasant and traumatic event, but properly planned and implemented would at least give them the chance to move on.
We remain of the view that equities are fundamentally strong, highly liquid and on low valuations. It is however likely to remain a very volatile period in markets- there is no silver bullet.
Mark Burgess is CIO of Threadneedle.