Although Greece’s negotiations with its creditors have understandably dominated recent headlines, we think there is perhaps a danger of focusing too much on the world’s oldest democracy when there are other developments in the US and China that are likely to have a more significant and enduring impact on financial markets.
First, there has been a palpable pick-up in US economic activity after a ‘soft patch’, which has implications for interest rates and corporate earnings. Second, China’s fiscal and monetary policy appears to be becoming more stimulative, reducing the tail risks associated with a more severe economic slowdown.
We therefore continue to assess developments in Greece as part of that bigger picture. This is relevant, because certain scenarios in Greece may prompt coordinated central bank action – we cannot view these issues in isolation.
Equity markets have so far remained quite calm about the Grexit-related risks. This suggests that risk generally has been pared back a lot over the course of 2015 and that there is an understanding that the European Central Bank (ECB) is in a far stronger position to mitigate any fall-out than was the case three years ago.
With these provisos in place, please find below our current scenario analysis of how current events might play out in Greece over coming days and weeks. Although Greece’s euro fate seems to be getting ever closer to a 50/50 bet, we still think it is more likely that Greece will stay in the euro zone. For that reason, we place greater than 50% likelihood that one of the top three scenarios (1-3) in the table below occurs. Either of the bottom two scenarios (4 & 5) is therefore <50% likely in our view.
Finally, we think it is important to understand some of the potential channels for contagion if Greece does actually leave the euro (scenarios 4 & 5). Even here though, the level of ECB fire-power gives us some comfort that the risk of real economic and financial contagion is limited. In the Appendix we detail these contagion channels, explain how we are monitoring them day to day, and also how we think authorities are placed to address them.
As far as our positioning is concerned, we have no direct exposure to Greek assets in any of our emerging market fixed income or multi-asset portfolios. Within the bond markets of the neighbouring Central & Eastern Europe region we are positioned defensively.
Scenarios for Greece
Medium-term scenarios |
Likely paths to this outcome |
Market implications |
|
1 |
Syriza (the political party in power in Greece) implements euro bailout package |
Greeks vote ‘Yes’ to proposed package, Alexis Tsipras, leader of Syriza,resigns, to be replaced by another member of the party. |
Stability in the short-term but significant implementation risk |
2 |
National unity/ technocrat government implements euro bailout package |
(i) Greeks vote ‘Yes’, Tsipras resigns (ii)Greek President forces unity government solution |
Least disruptive market outcome |
3 |
New pro-euro government implements euro bailout package |
(i) Greeks vote ‘Yes’, Tsipras calls elections (ii) President forces early elections |
Significant near-term uncertainty but improved medium-term outcome for markets |
4 |
Syriza oversees disorderly Greek exit from euro |
(i) The Greek people vote ‘No’ to proposed package, Syriza attempts to remain in euro without funds, banking system collapse (ii) Referendum does not take place (iii) delays mean feasible new programme becomes impossible |
Material short-term uncertainty requiring significant global central bank action, less ‘moral-hazard’ for euro-zone peripheral nations over longterm |
5 |
Syriza oversees orderly Greek exit from euro |
Greeks vote ‘No’ to proposed package, Syriza accepts this means euro exit and agrees timetable to withdraw, possibly with concessions to remain in EU |
Less disruptive short-term, sets worse precedent for other peripheral nations |