June 20 2015
Greece is on the verge of leaving the Euro. Whilst Eurozone capital markets are likely to deliver an initially muted response, we will see a long-term re-valuation of the price of peripheral Eurozone bonds and stock markets as investors price in the risk that other countries may, in time, follow Greece.
The comments from Tom Elliott, International Investment Strategist at deVere Group, one of the world’s largest independent financial advisory organizations, come as the Greek debt crisis is reaching a climax following Thursday’s failed crunch talks with the Eurogroup finance ministers.
Mr Elliott explains: “It is becoming increasingly clear that the Greek saga is coming to a head. The Greek government knows it. The IMF knows it. And the Eurogroup knows it.
“We’re moving into unchartered waters. We’re about to witness the fragmentation of the single currency and witness the return of the drachma.
“How are Eurozone capital markets likely to immediately respond? In the words of T.S. Eliot: ‘Not with a bang but with a whimper.’
“The ECB is able to limit contagion to other Eurozone bond markets through its Open Market Transaction (OMT) policy, which helpfully was declared a legal tool of monetary policy by the European Court of Justice (ECJ) just this week. This will substantially Eurozone limit bond market volatility in the wake of a ‘Grexit.' [Greek exit]
“And with only 18 per cent of the outstanding Greek government bond market in private hands, Greek default will not cause havoc with non-Greek banks, who have largely washed their hands of the stuff.
“One oddity is that Greece may decide to honour privately-held debt but not the 72 per cent held by IMF, ECB, Eurozone governments and other creditors.
“Bizarrely, this means that Greece could be forced out of the Euro while seeing the value of privately held Greek Government Bonds might appreciate if the government promises to honour that part of the debt. While treating creditors of the same bonds differently raises legal problems, it will avoid Greece being labelled as ‘in default’ by some of the credit agencies, such as Standard and Poors, who only look at the risk of default on privately-held debt in their calculations.
Whilst the market response is likely to be muted in the immediate aftermath of a ‘Grexit’, Mr Elliott says greater market volatility should be expected moving forward.
“In the longer term, other peripheral Eurozone capital markets will be more risky due to the likelihood of interest rates rising relative to those of Germany. After all, who might be the next country to be thrown out?
“Market interest rates in Italy, Spain, Portugal, and any other country that might run into a crisis in the future, will never be as low relative to those of Germany ever again if – or rather, when – Greece leaves the Euro.”
With this market turbulence will, says deVere Group’s International Investment Strategist, come opportunities.
“Capital markets are expected to be volatile in the longer term and this will, inevitably, present challenges but also standout opportunities for investors.
“For instance, UK stocks are likely to be considerably cheaper in the wake of a ‘Grexit.’"
He concludes: “Due to likely unprecedented circumstances, investors would be wise to review their portfolios in order to ensure their financial objectives remain on track, that they mitigate any avoidable risks, and that they take advantage of prevailing opportunities.”