The announcement last weekend by Greece’s left wing Syriza-led government took most people by surprise: a referendum allowing the public to vote on proposals put forward by the country’s creditors effectively brought an end to negotiations between Greece and representatives of its creditors, the European Commission, the European Central Bank (ECB) and the IMF.
In our eyes, the Greek government’s approach has created additional animosity that probably was unnecessary. But what is more significant is that the ballot scheduled to take place on Sunday presents little chance of bringing the situation to a conclusion.
The initial reaction of the markets to the surprise announcement of the referendum was, in our view, quite well contained and markets seem to have remained quite relaxed. We’ve not seen massive panic so far, which I think is constructive, although I would not be surprised if some of the riskier assets underperform until fundamentals reassert themselves.
Most commentators seem to feel that the probability of “Grexit” – a Greek exit from the euro zone – has increased, particularly in light of Greece’s failure to make the €1.6 billion (Dh6.51bn) repayment to the IMF that was due on Tuesday. But I still think that is a decision that will come down to the Greek people.
The European negotiators seem to have made it clear that if the Greek people vote “no” in the referendum – in other words, rejecting the proposals put forward by the creditor institutions – they would be voting to leave the euro zone.
On the other hand, I see a “yes” vote in some ways as more problematic. A vote in favour of the creditor institutions’ proposals would seem to signal that the Greek people do want some kind of deal, but the deal they’re voting on no longer exists – the programme on which the deal was based was allowed to expire this week after the announcement of the referendum.
Therefore, the Greek authorities would have to renegotiate. The bigger question is: Who would lead those negotiations?
The Greek prime minister Alexis Tsipras is spending much of his political capital attempting to persuade people to vote “no.” A “yes” vote would be viewed as a rejection of Mr Tspiras’ campaign, potentially prompting his resignation.
In that eventuality, we would be looking at the possibility of the formation of a technocrat government, or some kind of new coalition, to take on fresh negotiations. Further elections would be required down the road.
So although a number of commentators are looking to the referendum this weekend to bring some answers, I think it could actually raise more questions.
Even if Greece were to leave the euro zone, its economy represents only a small percentage of the euro zone’s GDP (less than 2 per cent) and a lot of firewalls have been built in Europe to try to minimise contagion among other euro area countries.
The ECB too has taken a decisive role and continues to monitor how the current situation is affecting the monetary transmission mechanism.
As the situation develops, the ECB has a number of tools at its disposal to deploy in the event of unexpected or unwelcome turns to keep the euro zone functioning properly in the way it wants, and to maintain easy monetary policy.
The ECB could potentially bring forward some of the purchases of its quantitative easing (QE) programme; in other words, make the same amount of purchases, but make them now as opposed to over a long period of time. The ECB could possibly increase the QE programme or intensify the schedule of Outright Monetary Transactions.
Meanwhile, we recognise that while there is short-term volatility stemming from the uncertainty over Greece, the situation does present opportunities for investors. There may be bargains to be found as corporate bonds are sold off on the back of some of the negative sentiment generally.
Most importantly, we should not forget the long-term focus of our investments. The overall fundamentals in Europe haven’t changed, and remain positive in our eyes. Additionally, structural reforms in peripheral euro-zone economies such as Spain and Italy seem to us to be encouraging signals. And the central bank has demonstrated that it is willing to address potential problems that may arise from this current crisis. Over the long term, we believe opportunities should continue to emerge from Europe no matter how this situation finally plays out.
