Market Bulletin - Bank holiday
Markets slump as Greek banks remain shut and the country’s debt crisis deepens.
The tragedy of Friday’s terrorist massacre on a Tunisian beach rendered inappropriate the use of the same word to describe the ongoing saga of the Greek debt crisis. Unavoidably though, the two events were the focus of world attention as another week of increasingly bitter negotiations and a breakdown in bailout talks culminated in the inevitable announcement that Greek banks would remain closed, and capital controls would be imposed, until after the surprise referendum called by the Greek government. These steps took the country nearer to the exit of the euro area, since a core rule of the eurozone is that there should be no restrictions on the movement of money or capital.
Late on Friday, Greek Prime Minister Alexis Tsipras announced a referendum for Sunday 5 July on whether to accept the latest terms being offered – five days after the final repayment of €1.6 billion to the International Monetary Fund (IMF) is due. Underlining the sense of chaos within the Greek government was news that its team of negotiators in Brussels only found out about Tsipras’s call for a referendum via Twitter, just before midnight on Friday. Earlier that evening, Greek finance minister Yanis Varoufakis had sounded an optimistic note about a deal when interviewed by local television, and both sides were reaching agreement on a joint proposal to be presented to a meeting of finance ministry officials on Saturday. Unsurprisingly, the talks broke up after Tsipras’s bombshell, delivered upon his return from week-long negotiations in Brussels.
The European Commission plans to publish later today its 10-point plan for bailout requirements, “in the interest of transparency and for the information of the Greek people,” said Commission president Jean-Claude Juncker. The plans, which take account of previous Greek proposals, and have reportedly been endorsed by the European Central Bank and IMF, include VAT, pensions and labour market reforms.
The Syriza party claimed that the referendum was the very definition of democracy. The counterview is that it is the only way the current government can hope to remain in power while accepting the terms of the deal. The party was elected on the back of a promise to keep the euro and bring an end to austerity, but it seems increasingly clear it has realised there is no possibility of both.
In response to the referendum announcement, the European Central Bank said on Sunday that it would not increase its emergency funding for Greek banks. However, the bank also said it would continue to review the decision, and invited the Greek government to continue negotiations. On Sunday evening came news that Greek banks would remain shut on Monday and that capital controls would be imposed. The Athens stock exchange will also remain closed on Monday. The capital controls include a daily cash withdrawal limit of €60 (£42) from accounts, the prohibition of overseas cash transfers (except for vital commercial transactions), locking down of fixed-term deposit accounts and a ban on cashing cheques.
Prior to Sunday’s announcement, there had been reports of people camping over the weekend at banks so that they could be first in the Monday morning queues. Panicked savers have withdrawn an average of €1.3 billion a week so far this year. Since the election of the Syriza party in January, depositors have withdrawn more than €30 billion from the country’s banks; more than 20% of the capital held at that time.
Greek banks are now expected to stay shut until 7 July, two days after the planned referendum. For an economy already weak, the temporary closure of the banks, and the introduction of capital controls, is very bad news. Greek people will have less money to spend and businesses less to invest, increasing the likelihood that the country will return to deep recession. Tsipras sought to reassure the Greek people that their bank deposits were fully secure. “The same applies to the payment of wages and pensions – they are also guaranteed,” he said.
In or out?
Greece is the second euro-area country, after Cyprus in 2013, to declare an emergency bank holiday and impose capital controls. However, as Cyprus showed, falling out of the euro would not be inevitable. The Cypriot government introduced similar restrictions in 2013 and has since taken steps to mend its finances while remaining in the euro. Tsipras has no mandate from the people to take them out of the euro. It is reckoned that 80% of Greeks want to remain in the eurozone. Over the weekend, the Citigroup economist who coined the term ‘Grexit’ back in 2012 said he believed Greece would stay in the euro area. “We expect the referendum to result in a comfortable majority for the ‘Yes’ camp, and expect no Grexit this year, and a lower risk in subsequent years,” wrote Ebrahim Rahbari. In contrast, Barclays believes a ‘No’ vote and a Greek exit from the eurozone is the most likely outcome. Deutsche Bank analyst Francis Yared says the situation highlights the risks to the eurozone as a concept. “Longer term, the events in Greece are a stark reminder that the current eurozone architecture is vulnerable to domestic politics.”
After rallying last week amid initial optimism over a deal, the gains in equity markets have been more than reversed in the morning’s trading, as the weekend’s developments spooked traders who were caught unawares by Tsipras’s referendum call. The FTSE 100 Index slumped 2.2% in early trading and the STOXX Europe 600 Index tumbled 2.8%. Germany’s DAX index and France’s CAC 40 were both down more than 3%; while earlier in Asia, Japan’s Nikkei index fell nearly 3%.
Elsewhere in the world, the S&P 500 index fell 0.4% last week, as market participants preferred to focus on prospects for US interest rates and upcoming corporate results. Chinese equities endured another torrid week as fears of a bubble continued to worry investors. The market suffered one of its biggest ever one-day falls, sinking 7.4% and taking its reverse to -18% since 12 June.
Despite worries about the deepening crisis in Greece, market watchers say that European markets are better equipped to handle the short-term volatility because the economic situation in the eurozone has improved since 2011. Laura Sarlo of fund manager Loomis Sayles commented, “It is important to remember that direct financial contagion channels are smaller than in the 2012 crisis. Countries have pared cross-border exposure via the banking systems considerably. Data shows a decrease in German and French combined gross exposures to Greece from €260 billion at the end of 2009 to €15 billion at the end of 2014.”
Stuart Mitchell of S. W. Mitchell Capital added, “The impact on the rest of the eurozone may be rather less than some expect. The majority of Greek bonds are held by the ECB and the power of QE should limit any possible disturbance in the peripheral bond markets.”
Whether or not Greece makes the repayment to the IMF on Tuesday will be the next test for markets but, as always, our advice to investors is to sit tight in such periods of short-term volatility.
Loomis Sayles and S. W. Mitchell Capital are fund managers for St. James’s Place.
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