DID someone say “Greek crisis”? Amid the torrent of doom-laden coverage on soaring unemployment, catatonic austerity and shockwaves across the eurozone and beyond, markets have been eerily calm.
If there is an impending crisis, you would be hard put to spot it in those most sensitive barometers of trouble afoot.
On Friday, the FTSE Eurofirst 300 Index rose 0.3 per cent, trimming its loss on the week to just 0.9 per cent. Similarly, the FTSE 100 Index edged higher on the day, leaving it just 1.1 per cent down on the week at 6,710.45.
As for Wall Street, the Dow Jones Industrial Average is still close to record highs at 18,015.95, with the S&P 500 Index up 0.9 per cent on the week. Shorter-dated US Treasury bond yields were at their lowest since the start of the month. As for the much-feared “contagion effect”, Spain’s ten-year yield was up only two basis points over the five-day period and Portugal’s by just one basis point.
But surely the euro took a bashing? No so. While it slipped 0.2 per cent against the dollar on Friday, it closed 0.6 per cent up on the week.
If that’s the considered verdict of the markets, why need we worry much about “Grexit” at all? The key word in that sentence is “considered”.
One factor obscuring the impact on the euro has been a relative weakness of the US dollar on concerns over a change in US Federal Reserve interest rate policy. Speculation of an early rise has helped support the dollar. But the Fed said in a statement last week that interest rates would be raised only gradually, while observers felt the likely “lift-off” date had been pushed back to at least the end of the year.
Markets may also be taking a view that a Greek exit from the euro may not mark the arrival of Armageddon many fear and that contagion concerns are over-done. Greece, says Kathleen Brooks of Forex.com, “is considered a political not a financial problem, thus it should not have a long-term impact on euro-based assets”.
She adds: “Ireland, Spain and Portugal are in stronger fiscal and economic positions than they were in 2010 and 2012, hence the risk of contagion is much reduced. The radical political backdrop in Greece is not replicated across other peripheral nations, and furthermore the private sector only has limited exposure to Greece.”
Alternatively, the markets are banking on a climbdown before the 30 June deadline for a repayment to the International Monetary Fund (IMF) of a €1.6 billion (£1.1bn) loan. On Friday the European Central Bank (ECB) threw a lifeline to the Greek banking system ahead of a crucial lenders’ summit between Athens and its creditors due today.
This suggests that, despite all the talk of 30 June being “the last stand” and “the final deadline”, one or more of the Troika – the ECB, IMF and Brussels – will fold and offer a compromise deal – until the next deadline.
So much euro fudge has been baked and eaten since this crisis began six years ago that it would be hardly surprising if another generous and impenetrable dollop was served up again in the coming days.
However, the “last-minute compromise” thesis may have reckoned without rapidly deteriorating sentiment among the Greek public and the accelerating rate of withdrawals from Greek banks. Gathering concerns over the solvency of the country’s lenders could well take matters out of the hands of Brussels negotiators.
This is the background to the latest lifeline thrown to Greece – a €1.75bn boost to €85.9bn in the “emergency liquidity assistance” available to Greek banks to allow lenders to pay back depositors. The extra support was in response to a gathering run on Greek banks as depositors filed at bank branches and ATMs to withdraw cash. The support was notably less than the extra €3bn that Greece had requested.
Savers are reckoned to have taken out €1.5bn in deposits on Friday alone. About €5bn is thought to have left the system last week and bankers fear the pace of withdrawals could speed up today when banks reopen. There are real concerns the country’s financial situation could rapidly slide out of control if the bank run is not halted. Another concern is that the country’s four biggest banks hold almost €15bn in Greek government bonds, whose value would take a significant hit in case of a missed payment to the IMF.
Until the situation is resolved one way or another, there is little that investors can do other than wait on the sidelines. Even if there is yet another “fudge” compromise and markets enjoy a relief rally, it may well prove short-lived as the prospect of yet more “last-minute deadlines” stretches ahead. Greek dramas are not known for their happy endings.