After months of negotiations, it is difficult to understand why we are in a situation where the Greek banks are closed, the Athens stock exchange is not trading until further notice, full capital controls have been put in place, and the ATM withdrawal limit in Greece is €60. You have to ask the question: is it all over for Greece?
Well, we think not. The measures bear remarkable similarities to what happened to Cyprus, even though the latter situation was a bail-in rather than a bailout. And in Cyprus, a last-minute solution was found. The people of Cyprus were taken by surprise but, in the end, the country’s debt was paid off in just a few days.
The threat of capital controls has been hanging over Greece for a long time and very few people thought the current government would outlast the crisis, and certainly not demonstrate the strength of resolve in continuing to oppose the wishes of the European Union.
This may indicate there are still some options left. The one action that could lead to a financial meltdown is if the European Central Bank (ECB) stops the emergency liquidity assistance (ELA) programme to Greek banks.
However, we believe that this is very unlikely. The ECB will review the situation on a daily basis, as it knows the effect stopping the ELA would have.
Germany is clearly the leading player in the EU, as it has both financial and political reason to keep the European Union intact.
If Greece leaves the euro, this would be a major failure for Europe. If the European Union fails to resolve the Greece crisis, then how can it be expected to resolve an even bigger issue such as Italy’s external debt, which recently surpassed €2.2 trillion?
Financially, Germany is the country buoying up and bailing out all the other countries, which is why it is insisting they manage their economies better through tax increases and cuts to pensions and salaries.
A key political concern for Germany is the Greek government standing up to the EU states. If it succeeds in imposing its “left-wing” agenda, Spain, which has just elected a left-leaning parliament, and other countries may follow, which could be the greatest game changer in the history of the European Union.
The Greek crisis has undoubtedly had a major effect in markets across the globe. Yesterday, markets took a sharp hit at the start of the Asian session: the Hang Seng fell 2.6 per cent, Nikkei-225 lost 2.88 per cent, and Shanghai Composite Index entered a bear market, after declining by more than 20 per cent from its latest peak. This is despite the intervention of the People’s Bank of China this past weekend. In Europe, indexes across the board declined sharply, with an average fall of 2.5 per cent, including the DJ euro Stoxx, FSTE100, CAC40, Dax 30, Ibex and S&P/MIB.
The Greek 10-year yield soared by 358 basis points to as high as 14 per cent, the highest level since November of 2012, increasing the likelihood for a Greek default. Spain, Italy and Portugal’s 10-year yields spiked by an average of 20 basis points each.
However, Germany eased back to 0.77 per cent, France to 1.19 per cent and the UK to 2.05 per cent.
The euro suffered in the Asian session, reaching as low as 1.0955 against the dollar. However, declining European equities after the opening bell, and traders being forced to hedge positions with euros forced the euro-dollar exchange rate back up to above 1.11.
It is very clear that the markets are extremely worried about the impending default. The figures speak for themselves. But will it actually happen? For all the volatility, the news and the analysis, we still feel that the EU will not, and cannot, let Greece leave the euro.
We are certainly facing a Greek drama but we hope that in the last few minutes, as has happened many times over the past five years, the issue is resolved and the drama does not become a tragedy.
Nour Eldeen Al Hammoury is the chief market strategist at ADS Securities.
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