30th June 2015
The path ahead is likely to remain unsettled for Greece, whatever the outcome of the referendum, says Ariel Bezalel, manager of the Jupiter Strategic Bond Fund.
We have long held the view on the Greek crisis that some sort of resolution would be found to kick the can down the road, and that a referendum was pretty likely since Alexis Tsipras simply does not have the mandate to agree to some of the pretty tough measures asked of Greece by its creditors. Now we have reached that point, the polls show that most Greeks are in favour of staying in the eurozone, so a favourable outcome to the referendum (i.e. a “yes” vote) is likely, in our opinion.
However, the decision by eurozone finance ministers not to extend the bailout programme to beyond the referendum has added to the country’s problems. It effectively means the Greek population is voting for a deal that may no longer be on the table. As Wolfgang Munchau outlines in today’s FT*, even a “yes” vote will be no panacea for a return from the brink and there’s likely to be a period of extended uncertainty due to political upheaval.
Ultimately, our belief is that at less than 2% of GDP and with much of Greece’s debt held by the public sector (c.76%) the fallout should be fairly well contained in the event of “Grexit”. We do not see this as a Lehman moment. With regard to Tsipras, we think his future as the country’s leader is limited. An unfavourable outcome from his perspective (i.e. a “yes” vote) means the population does not believe in his approach and he would likely have to step down since Eurogroup officials, we suspect, would find it very difficult to negotiate with someone who is trying to persuade his population to vote “No”. On the other hand, an outcome where the Greeks basically vote for Grexit would likely lead to a further implosion of the Greek economy and to his eventual ousting.
Regional stability a priority for the ECB
A sell-off in peripheral government bonds (such as in Spain, Italy and Portugal) could lead to more aggressive intervention by the European Central Bank (ECB) to keep a ceiling on yields. This is the key takeaway from the statement that the ECB released last night, which echoed the “whatever it takes” assurance that Mario Draghi gave in July 2012 and follows the central bank’s decision not to provide more liquidity to the Greek banking system. In its press release, the ECB wrote: “The Governing Council is closely monitoring the situation in financial markets and the potential implications for the monetary policy stance and for the balance of risks to price stability in the euro area. The Governing Council is determined to use all the instruments available within its mandate.”