Group Economics
Daily Insight
Macro & Financial Markets Research Nick Kounis,& Aline Schuiling
Down…but no Grexit panic
+31 20 343 5616 ,
30 June 2015
Markets dropped sharply, but there was no real panic, with spreads not at stress levels Investors may not expect Grexit and may not think it will have a disastrous impact in any case Meanwhile , the Greek economy moves further into recession, as signalled by a drop in sentiment
Markets: down but no panic
Greece: economic sentiment and GDP growth
Predictably, financial markets weakened sharply after the
Index
weekend’s events in Greece, which increased the risk of default and euro exit. However, there was no real panic. Perhaps, the most pronounced weakness was in equity markets. Eurozone equities were down by more than 4%, but this only really reversed gains seen a week ago, when markets
% qoq
4 3 2 1 0 -1 -2 -3 -4 -5 -6
120 110 100 90
rallied on hopes of an imminent deal. Peripheral equities and
80
banks led the declines.
70 60 04 05 06 07 08 09 10 11 12 13 14 15
Peripheral spreads widen, but still far from stress levels
GDP (lhs)
Similarly, peripheral government bond spreads over Germany widened sharply. Portuguese, Italian and Spanish bond yields jumped, while German government bonds benefited. Having
Economic sentiment (rhs)
Source: Thomson Reuters Datastream
said that, the level of spreads remains well below the levels
The ‘Greferendum’ campaign begins
seen at the height of the euro crisis.
Meanwhile, the focus of Europe is turning to shaping the outcome of Greece’s referendum. Greek PM Tsipras, said in a
Euro recovers to end higher against the dollar
speech on Monday evening that a NO vote would put Greece
The euro fell against the US dollar at open, but it remained
in a strong position to negotiate. On the other hand, the
relatively resilient and eventually recovered to finish the day
leaders of France, Italy and the European Commission made it
up. The euro’s resilience partly reflects the general lack of
clear that they equated a NO vote in the referendum to a vote
panic in euro assets, however there other factors. The US
for euro exit (even though officially the question is about the
dollar is behaving as a cyclical currency, so market weakness
institutions’ plan). The logic being that the pro-euro Greek
is not a particularly favourable background for it despite it
public would – having understood this - be more likely to vote
emanating from the eurozone. In addition, the SNB’s
YES.
intervention was also supportive. Economic sentiment in Greece drops, eurozone resilient Investors may not buy into Grexit scenario…
Meanwhile, economic sentiment in the eurozone as measured
What explains the lack of a market meltdown? One possibility
by the European Commission edged lower in June, declining
is that investors still do not think that a Greek euro exit is the
to 103.5, down from 103.8 in May. The long-term average
most likely scenario. That is also our judgement. We think that
value of the series is 100, and at the current level it remains
a YES vote is most likely in the referendum, which would open
consistent with economic growth having picked up somewhat
up the prospect of a deal between Greece and its creditors,
after Q1, when GDP expanded by 0.4% qoq. That said, as
possibly with a new government in place.
expected, sentiment in Greece continued to drop. It fell to 90.7 in June, down from 91.4 in May, moving further into recession
…while also not expecting it to be a disaster
territory. Indeed, we expect the recession in Greece to have
In addition, investors may judge that the negative fall-out from
deepened significantly on the back of rising uncertainty and the
a possible Greek exit would be much less than in 2011-2012.
capital and deposit controls that were imposed by the Greek
Indeed, exposures of the eurozone private sector to Greece
government. The indicator is therefore likely to drop
have come down sharply. At the same time, the ECB’s OMT
significantly further going forward.
programme can be activated to calm markets.