Friday

6th Dec 2019

Asian markets react mildly to Greek referendum

  • Moody's: 'A Greek exit from the euro zone would be devastating to Greece's economy, but no one else's' (Photo: Guilhem Vellut)

The value of the euro and of European shares dropped in Asian markets on Monday (29 June), but news of the Greek referendum didn't cause panic.

The single currency went down by almost 2 percent against the dollar, before a slight recovery, and by three percent against the Japanese yen, seen as a safe haven.

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Shares in leading British, German, and French firms also fell by 2.9 percent to 3.8 percent. Asian shares fell by 0.4 percent to 2 percent, while the value of gold, also a safe haven, went up 0.8 percent, financial newswires report.

Analysts say the dramatic turn in Greek bailout talks over the weekend came as a surprise.

"The market was not positioned for this going into the weekend”, Deutsche Bank managing director Nick Lawson told Reuters.

Bank of New Zealand strategist Kymberly Martin told the New York Times: “Most people’s ... forecast was for them to muddle through with some kind of a deal”.

Evan Lucas, a strategist at IG, a London-based trader, told Bloomberg: “Markets clearly weren't ready … It will be a sea of red all day today. Risk mitigation will be everything”.

The jitters come after Greek negotiators abandoned talks with eurozone ministers on Friday, when Greek PM Alexis Tsipras said he’ll hold a referendum on 5 July on the creditors’ current proposal.

His decision means Greece is likely to default on a €1.6 billion repayment to the International Monetary Fund (IMF) on Tuesday, when it’s bailout expires.

For its part, the European Central Bank (ECB) maintained its lifeline for Greek lenders, but not enough to prevent Athens from closing banks on Monday and imposing capital controls.

Euro ministers on Saturday noted that if Greek voters say No next weekend, it could lead to a Greek exit from the euro.

But they said the eurozone is stronger than it was four years ago, when fears of a Greek exit first surfaced.

“European banks are not in the same place they were … they’re much better protected”, France’s Michel Sapin said.

The Irish finance minister, Michael Noonan, noted the ECB has an “array” of instruments to stop contagion, including “unfettered freedom” to buy euro governments’ bonds.

The Council on Foreign Relations, a US think tank, in May calculated that if Greece defaults, Germany, it’s main creditor, would lose €58 billion, or 1.9 percent of GDP.

Slovenia would lose the equivalent of 2.6 percent of GDP.

But Italy would be most at risk, with a €39 billion loss pushing its national debt to near-unsustainable levels.

The risk of wider fallout saw the US treasury secretary, Jack Lew, call Greek PM Tsipras and IMF chief Christine Lagarde on Sunday.

His office, in a statement, “underscored that it is in the best interests of Greece, Europe, and the global economy to find a sustainable solution that puts Greece on a path toward reform and recovery within the eurozone”.

But experts, by and large, agreed with the euro-ministers’ analysis.

"Right now the surprise is that the euro is not weaker”, Steven Englander, a strategist at CitiFX, a New York-based trader, told Reuters.

“The logic may either be that the Greek government will come back to the negotiating table or that it will not survive long, if Yes prevails contrary to their recommendation”.

Enrique Diaz-Alvarez, a risk officer at Ebury, a UK-based trading firm, told the FT: “As bad as this looks, I believe the situation presents hopeful features, and is still amenable to a positive resolution".

“Initial polls released over the weekend all suggested a clear majority of Greeks would vote to support the agreement offered”.

Mark Zandi, an economist at Moody's, a US-based ratings agency, told AP that: “European banks have [already] shed much of their Greek debt and they have significantly increased their capital”.

"A Greek default and exit from the euro zone would be devastating to Greece's economy, but no one else's … So, the Greek standoff will be disconcerting to financial markets, but only temporarily”.

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