The on-going drama regarding whether Greece will default on debt repayments and leave the Euro has increased market volatility considerably, and this has been exacerbated by the recent substantial falls in the Chinese stock market.
Greece – the ‘No’ vote and implications
On Sunday 5 July, Greece held a referendum on the terms creditors offered for the latest bailout package. The referendum results have been confirmed with 61.3% voting to reject the bailout offer. Ahead of the vote, the Greek Prime Minister, Alexis Tsipras stated a ‘No’ vote would give him a stronger bargaining position to go back to the EU authorities to try and negotiate a third bail-out package (now that the second bail-out package has expired).
So far, there has not been any official response from the EU authorities (i.e. the European Central Bank (ECB), the EU Commission and the leaders of the major EU nations). However there will be an emergency summit of EU leaders to discuss the next steps.
What does the ‘No’ vote mean for Greece’s place in the EU?
It’s still unclear if the ‘No’ vote will result in a Greek exit from the EU – and indeed, both the government of Greece and most other national leaders continue to state that they want Greece to stay within the EU.
But the risks of a disorderly exit for Greece from the EU have now risen sharply. It would seem that the EU authorities would be very reluctant to set a precedent for Greece that involves some sort of debt forgiveness, as other EU nations that have had to implement difficult reforms (i.e. Ireland, Spain and Portugal) could be justifiably aggrieved that Greece ends up with a ‘better’ deal. The Greek government is clearly stating, however, that some type of debt restructure must be part of any agreement.
What next for Greece?
Any subsequent bail-out package for Greece is likely to take weeks, rather than days to negotiate. The ECB held a meeting on Monday 6 July to decide on the next course of action. Of critical importance to the ECB (and to Greece) is the ongoing provision of Emergency Liquidity Assistance (ELA) by the ECB to the Greek banking system – via the Greek Central Bank.
Greek banks could be expected to remain closed until the ECB makes some decision on ELA funding.
The next critical date is 20 July 2015. On that day, there is the maturity of a €3.5bn Greek sovereign bond, which is currently held by the ECB and other national central banks which was purchased through the Securities Markets Program. Greece, however, does not have the money available to repay this debt and so a third bail-out package or at least some sort of short-term funding arrangement will likely need to be in place by 20 July, at the latest.
It is also important to note that only about 12.6% of all Greek debt is held by the private sector – following the 2012 bail-out package. So this really is an issue for the IMF, the ECB, the European Financial Stability Facility (EFSF)/European Stability Mechanism (ESM) and other European authorities.
The Chinese share market
After a spectacular rise of over 100% during the past year, the Shanghai stock market has fallen approximately 30% over the past month and this has led to speculation that the Chinese economy might be slowing more significantly than expected. Clearly if that did happen it would be bad news for Australia given China is our largest trading partner.
While I consider Chinese developments as potentially much more significant for Australia than developments in Greece, the fears are likely somewhat overblown given that the Chinese share market is comparatively much less significant than the share market in Australia or other developed countries, such as the USA. China has grown it’s economy at a very rapid rate over the last 20 years and a growth slowdown is inevitable, but the Chinese Government has been able to maintain solid growth during past periods of turmoil, such as the GFC, so a “hard landing” (substantial fall in growth) still seems unlikely.
While the developments in Greece and China are somewhat concerning, these sorts of geopolitical issues are common – remember when we were all focused on Ukraine last year – and in most instances they have little lasting impact on financial markets. In reality the continued growth in the US economy is likely of greater lasting importance. Nevertheless, if you have any concerns regarding your investments don’t hesitate to contact me.
This newsletter contains general advice. It does not take account of your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.