On Sunday, Greece announced it would keep its banks closed in an attempt to avert its fourth financial crisis in the last five years. The Greek government made the decision to keep its banks and stock market closed and impose capital controls after the European Central Bank (ECB) said it would not expand an emergency loan to the Greek banks needed to pay its international creditors. German Chancellor Angela Merkel and French President François Holland indicated that no further concessions would be granted to keep Greece from facing default. Greece faces a referendum on July 5th to either accept the bailout terms set forth by the creditors or face a potential exit from the Eurozone. Source: Bloomberg.
Markets across the globe experienced a sell-off from the negative Greek sentiment. In Europe, the pan-European Stoxx 600 dropped 2.6%, while Germany’s DAX and France’s CAC both closed more than 3% lower. Asian markets fell as well, with Japan’s Nikkei 225 down 2.8% and China’s Shanghai Composite off 3.2%. Though trading has not yet closed in the U.S. as of this writing, Wall Street appears to have joined the sell-off; the Dow Jones Industrial Average fell 200 points in early trading, and the Nasdaq and S&P were both off more than 1%. Source: CNBC.
Is this crisis different? As we attempt to discuss this question, let us look at the last three times Greece faced default: in 2010, 2011 and 2012. Each time, after numerous games of chicken, the ECB bailed out Greece and kept it in the Eurozone. The markets increased in volatility as the crisis was playing out; however, the markets maintained their sanity as the MSCI World ACWI Index (which covers approximately 85% of the global investable equity markets) ended 2010 up 13.21%, down 6.86% in 2011, and returned 16.80% in 2012. Source: MSCI.
Greece has faced default many times in its history. Since its independence from the Ottoman Empire in 1829, Greece has been in default 46% of the time, according to data from Charles Schwab, International Monetary Fund and Eurostat (see chart 1 below). Market volatility has been a part of Greek debt crises several times before.
What would be the likely impact of Greek default? While there are fears that the Greek default might derail the stock markets and global recovery, here are few reasons to believe that any potential Greek default might not be a major market event this time either:
- Over the last 5 years, global growth has recovered significantly and most major economies are growing. In other words, the world economy and markets may be more resilient to a potential Greek default. In June, European economic activity grew at its fastest pace in the last four years, as the flash Market Composite Purchasing Managers’ Index (PMI®), which tracks manufacturing and service sector activity, rose to 54.1, a four-year high. Source: CNBC.
- The European Central Bank has taken a more proactive role by introducing its own version of Quantitative Easing, and has been more vocal about standing firm to avoid any European contagion, thus reducing the risk of panic spreading across Europe. The 10-year Spanish bond yield is trading today at 2.35% down 28bps from a year back. JP Morgan shows the bond markets’ lack of panic with the bond yields substantially down from previous default periods (see Chart 2 below). Source: JPMorgan Asset Management, Guide to Markets, as of May 31, 2015.
- The U.S. has limited exposure to Greek debt. France and Germany have the greatest exposure to the Greek debt (see Chart 3 below). Source: BBC. The leaders of both countries have stressed the importance of maintaining the Euro and Europe’s stability. They have publicly addressed the critical importance of Europe staying together and not withering down due to crisis from Greece. As Chancellor Merkel said, “Europe can cope with such crises much, much better today because it has taken precautions.” Source: Bloomberg.
Many deadlines have come and gone. A last-minute deal might be struck, or a default may be imminent. The politicians may continue to play the game of chicken and egg or Germany and France may finally throw in the towel to remove support from Greece. Regardless, we are hopeful that this crisis will not end with a crash, but a whimper. Numerous countries have experienced defaults in the past, yet markets continue to grow long term, overcoming short-term noise.
How does it impact GV client portfolios? Our client portfolios have limited exposure to Greece. Given the risk of market volatility, markets getting expensive, geopolitical risk among other factors, we repositioned our portfolios defensively in the last 18 months. While the Euro and the stock markets could come under pressure this week should Greece miss its June 30th debt payment, we do not recommend making trades based on short-term noise. The risk is that investors could get whipsawed by any market reaction. An agreement between Greece and its creditors in the next few weeks could happen and spark a quick recovery in the markets.
If history is any guide, we believe that the present economic uncertainty will create new opportunities over the long term. Businesses will find new ways to profit and investors will find ways to benefit from the market’s inefficiencies. While there is no certainty in investing, over 200 years of history show that the markets have rewarded fundamentals − companies that offer valued products and services and make sustainable profits attract investor attention.
From all of us at GV, we wish you a great July 4th celebration with your family and friends.