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How Will the Greek Drama End?

13 July 2015 in Investing Insights

For a relatively small country, Greece has given investors quite the scare. Buckle up for the possibility of increased market volatility as the drama surrounding the bailout of the overleveraged country continues.

The situation’s potential to impact the U.S. has to do with the fact that foreign sales account for about 40 percent of total turnover in the Standard & Poor’s 500. Over half of the companies in the index receive more than 15 percent of their revenues outside of the country.1


Fortunately, the European Central Bank reassured financial markets that it has the tools to address any contagion that may arise from the standoff between Athens and its creditors.2 This could bear fruit, especially given that Greek banks are now isolated from other parts of the world.

The eurozone portion of Greece’s $271 billion bailout has expired, and a default on a $1.71 billion payment to the International Monetary Fund last week means Athens isn’t eligible for any more loans from the fund (note that the IMF gets nearly 17.7 percent3 of its funding from the U.S.). A crucial €3.5 billion bond repayment to the European Central Bank is due July 20.

If Greece exits the euro, analysts expect that Europe would fall into recession and that the ECB would step in to help by pumping money into the system. That in turn is expected to weaken the euro currency and reduce its liquidity, based on historical performance. While that could strengthen the dollar in the short term, on a longer horizon that may have a negative impact on U.S. companies’ revenues.

More immediately however, the markets appear to be expecting Greece to come to the bargaining table: The European Union has given Greece a five-day ultimatum to either agree to bailout terms or exit the EU. Soon after that announcement, stock markets began to recapture some of the losses taken in response to Sunday’s referendum vote by Greece—but that upswing was short-lived and stocks ended down for the day.

Reaching a new deal with its creditors is the highest priority for the Greek government.4 With bank deposits blocked and the government in default vis-à-vis the IMF, the liquidity squeeze on the Greek economy is intensifying. If an agreement is reached, financial tensions between Greece and the euro area–where Greece is legally and institutionally a full participant in the euro, but Greek banks lack access to ECB facilities–is likely to persist for some time.

A definitive Grexit cannot be ruled out and the possibility of that outcome is rising. In the event of Grexit, we are likely to see renewed urgency in terms of institutional steps to increase integration among the rest of the euro area. This could include expediting the unification of banks with a common system for guaranteeing deposits.

1Standard & Poor’s Dow Jones data, via Platt, Eric, “S&P 500 Earnings Face Dollar Headwind,” Financial Times, January 19, 2015.

2“ECB’s Task Is to Contain Contagion,” Financial Times, June 16, 2015.

3IMF website

4Neuger, James G. and Christie, Rebecca, “Greek Creditors Clash on Bridge Financing,” Bloomberg, July 7, 2015.