The Greeks have delivered a resounding “no” vote to continued austerity. Several polls estimated ‘a too-close-to-call’ outcome, but more than 60% of Greece’s citizens voted against proposed reforms. Now that the emotional vote is over, reality for voters has been sinking in this week. Images of pensioners waiting for severely reduced funds and talk of humanitarian aid offer a stark picture of the severity of the situation for the average Greek citizen. Many Greeks want to avoid austerity but keep the euro. That’s probably not going to happen.
Some Europeans do not have sympathetic opinions about the Greeks. Last week while in Italy, I dined with some Belgian and German businessmen. One of them is a c-suite executive for Union Carbide. They are a straight-talking group. Their opinion is that Greece is a black-market economy that has never had proper accounting, and Greece’s numbers were incorrect entering into the euro. As such, most Euroland business-people and high-end taxpayers understand the costs of a Greece exit, which is estimated at 700 euros per person, according to the Belgian businessmen. In fact, many citizens outside Greece don't see Greece continuing as part of the euro. It’s a forgone conclusion, from their perspective.
The “no” vote increases the gap between Greece and the rest of the eurozone. As a result, the future costs for Greece to stay in the euro could be higher than previous solutions. The logic is simple: the eurozone cannot allow members to break rules and get preferential treatment because other peripheral nations would try to get similar workouts. Anti-euro voices in Italy, Spain and Portugal might then come to the negotiating table and the currency would get very wobbly.
One other key point: Greece doesn’t have as much bargaining power as it did a few years ago. The last time Greece was at the negotiating table, eurozone leaders were concerned that the country would become a “Lehman moment” (i.e. a meltdown) and spread contagion in Europe and beyond. At the time, European banks owned most of Greece’s debt and the ECB had not yet started its QE program.
The eurozone today is in much better shape to handle a so-called Grexit. The IMF, ECB and other governments own about 80% of Greece’s debt. As such, the banks are healthier and it’s unlikely that Greece would cause a domino effect in the eurozone. There have also been key changes in the derivatives markets to help prevent Lehman moments around the world.
Nonetheless, the improved financial structure doesn’t mean a Grexit would be risk-free for investors. The euro periphery will continue to have some challenges, and there are political issues brewing in France and Italy that are anti-euro. As a result, there is some downside pressure on the euro, but a weaker — and united — euro is good for exports. In fact, a Grexit may set the stage for a future strengthening of the currency.
Overall, we believe Greece’s near-term economic impact on the eurozone and the rest of the world is contained, regardless of whether they stay in the eurozone or not. Greece’s GDP is a tiny fraction of the world GDP (about 0.03%) and the ECB and IMF are prepared to backstop eurozone banks and try to prevent contagion. Volatility could pick up during the adjustment period, but we don’t foresee any meaningful portfolio impacts. Longer-term, however, simmering political issues may push the idea of structured exits to the fore, and negative currency impacts will be more resounding and far-reaching. We’ll be watching closely.