How investors might weigh-up the Grexit

Greek elections“Be brave, and be patient” is one way of describing how some financial institutions are advising investors to act, as the risk of a Greek default and its exit from the Eurozone increases.

This morning stock markets fell after the European Central Bank (ECB) decided in recent days to not extend emergency funding and the Greek government subsequently announced a referendum to decide on the terms and conditions that creditors offered Greece in return for loans.

Greece runs the risk of defaulting on a €1.6 billion loan repayment on Tuesday.

But investors with minimal exposure to Greek assets “would be tempted to consider” the possible ‘Grexit’ a non-event because the bulk of the short-term damage from Greece leaving the Eurozone would be felt within Greece itself, says Stephanie Flanders, chief market strategist for Europe, at JP Morgan Asset Management.

“The European financial system now has much less exposure to Greece than in 2011 and 2012. It is also better equipped to deal with contagion to other countries – and so are the countries themselves,” she says.

Flanders also says Greece has been in default on its sovereign debt for roughly 50% of the time since it gained its independence.

Analysts at Bank of America Merril Lynch predicted this weekend that equity markets could easily fall 5% and revisit the lows of 3,400 seen on the Eurostoxx ten days ago, when an adverse outcome seemed to be priced in.

However, the bank also does not expect significant contagion. The bank’s economists have argued that it is likely that the ECB would tweak quantitative easing to support peripheral bond markets.

“Given our view that even a Grexit would be unlikely to trigger contagion on a significant scale, we would expect such support of bond markets to act to stabilise equity markets too,” the bank says.

However, Flanders says if Greece were to leave the Eurozone, there would be the longer-term effect of making the risk premium on European assets much higher and narrowing the room for manouevre in times of crisis.

“These costs are incalculable, but that hardly means they can be ignored,” she says.

Greece’s referendum will be held July 5.

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