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The Greece Debt Issue

Given the level of recent news regarding the current Greece debt issue, and the resultant volatility in markets, we thought it appropriate to provide you with an update.

What is the latest on the Greek debt issue?

  • After the “no” vote, the creditors, being 28 European Union leaders, will gather at a meeting on Sunday for what is described as a final chance to resolve a Greek crisis that began more than five years ago.
  • Mark reaction to the “No’ vote was muted as major markets remained largely unchanged.
  • The central bank indicated on Monday it would tighten requirements for collateral that Greek banks must post in return for loans advanced by the ECB/IMF.

What is the most likely scenario from Sunday’s meeting?

  • It seems the most likely scenario is that Greece will reach an agreement with the Eurozone leaders on Sunday for a new financing deal that will include economic overhauls and budget cuts, and debt relief in the form of extended debt maturities. However, this is far from being a certainty.

What are the implications of a “Grexit” (Exit from the Euro)?

  • The meeting by European Union leaders on Sunday and a bond payment due by Greece to the European Central Bank on July 20 are the decisive events in the country’s attempt to stay in the Euro and avoid a banking collapse.
  • At the height of the debt crisis a few years ago, many analysts worried that Greece’s problems would spill over to the rest of the world.
  • Now, however, if Greece were to leave the currency union, in what is known as a “Grexit,” it would not be such a disaster for the following reasons:
    • Greece is a very small economy. It’s just 0.25% of global GDP, it takes just 0.5% of Eurozone countries’ exports and it’s a trivial market for Australian exports. So the direct impact on the Eurozone, the global economy and Australia is virtually non-existent.
    • Private exposure to Greek public debt is now very low at about €60bn, with 80% of Greek public debt held by the IMF, the rest of the Eurozone and the ECB.
    • Other vulnerable Eurozone countries – namely Portugal, Ireland, Spain and Italy – are all now in better shape than was the case when Greece triggered the Eurozone sovereign debt crisis in 2010.
    • Europe & the ECB have put up safeguards to limit the so-called financial contagion.

Conclusion

  • European political leaders will undertake further negotiations surrounding the terms and conditions of any new financing deal.
  • During this period of further negations we will continue to see short-term volatility in financial markets.
  • While a “Grexit” would not set a good precedent as other countries could do the same, the probability of Greece causing a major crisis in Europe that threatens the global economy and financial markets appears to be low.

If you have any specific questions regarding the above information please contact an Intralink Adviser on (03) 9629 1100.

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