The stentorian rejection by the Greek people of the eurozone bailout deal on Sunday failed to trigger a feared bloodbath in financial markets yesterday – but there is blood in the water. Japan’s stock market fell 2 per cent, Hong Kong fell 3 per cent, while Paris and Frankfurt were off 2 per cent and 1.5 per cent respectively.
London was relatively calm, paring its fall to 50 points, while Wall Street was only off about 40 points in early trading. But while the fall in equities was more muted than the most doomsday scripts, we are not out of the woods.
Greece defaulted on its loan to the International Monetary Fund a week ago today, and the crunch day for paying back the €3.5 billion (£2.5bn) it owes to the European Central Bank is 20 July. If it fails to do that, it is effectively goodnight Vienna for the country’s membership of the euro, and the launch of the drachma will become virtually inevitable.
In the run-up to that crucial day, markets will hew to either optimism or pessimism. The optimists say Greece is a small, economically uninfluential country to the European Union that should never have been in the euro in the first place, and that the single currency zone will get by without it.
Those optimists will also say that European, and particularly UK, banks are far better capitalised than they were at the time of the 2008 financial crash and will be able to manage any backwash from a Grexit.
Investment bank Morgan Stanley estimates that European lenders have reduced their exposure to Greece by more than 80 per cent since the 2011-12 sovereign debt crisis.
The pessimists say this is whistling in the dark, that it is nonsense to think you can second-guess where this crisis is going, that it is uncharted waters.
They argue that nobody can be immune from the psychological blow to the European project a Grexit would deliver; that the repercussions could still hit European banks and that the contagion would also hit the City of London.
One touchstone will be what happens to southern European sovereign bond yields in the coming weeks. The pessimists fear the crisis could increase banks’ losses from bad loans and potentially drive up borrowing costs for European governments just as the EU – with the help of quantitative easing – seemed to be finally moving out of its extended downturn.
My feeling is that any Grexit does not threaten the entire EU project, that the latter has become bloated and unwieldy in the past decade or so anyway in a mad dash for expansion in eastern and southern Europe.
I also feel unsentimental financial markets, after inevitable some short(ish)-term jitters, will settle down when they realise the euro could get by without Greece, and the EU certainly could.
This is not meant to sound harsh. You have to feel for a country with a small industrial/commercial base, where sins of the past have left nearly one in two young people jobless.
I also think that, pragmatically, if Greece stays in the euro there has to be substantial debt write-off for the country. It can’t pay the interest on its debts, never mind the debt itself.
Any new package to keep Greece in the euro without such debt forgiveness is sterile, head-in-the-sand creditor dogma that will take us nowhere.
Having said all that, it could just be that Greece is better off over the medium term – and by that I mean at least a decade – by being outside the euro, and with a devalued drachma behind its attempts to right the country.