On June 30, Greece must pay €1.6bn to the IMF or default and face expulsion from the Eurozone. With talks breaking down over the weekend, which markets could suffer most in the event of a Greek default?
Equity markets on the periphery are at risk of destabilisation if capital is repatriated from exposed markets by anxious investors. But the FTSE 100 and Germany’s Dax could also fall further, says Accendo Markets’s Mike van Dulken. “We have seen the highs the Dax was enjoying in April (12,374.73 on 10 April) fall precipitously as negotiations have broken down.”
Of the major economies, German, French and Italian markets are likely to be hit hardest. Their benchmarks have the greatest exposure to the Greek banking system, says FxPro’s Angus Campbell. “With the Dax up just over 10 per cent year to date, its gains could be eradicated with a Greek default and imposition of capital controls.”
Bond prices have also fallen from record highs in April. Some yields have been spiking and, yesterday, the spread between Spanish, Italian and Portuguese government bonds and safe haven German bunds reached its highest point in 2015.
This trend is highly likely to continue should Greece default, warns Campbell. “While we may not see the extremes of a 5 per cent spread between German and Italian 10-year bonds, we could certainly see a doubling of the spread from 1.57 per cent where it stood yesterday.”
Mint Partners’ Bill Blain sees this as a sign of things to come, warning that European bond markets will stay “very volatile” in the near future. There should be less fear that Spain or Portugal may follow in Greece’s wake, given that both have made great efforts to reform, and more concern about Italy and smaller central and eastern European economies which have never effectively reformed, Blain adds.
In 2015, the euro has hit multi-year lows against a range of currencies, and this has largely been attributed to the European Central Bank’s €1.1 trillion bond-buying programme, announced in January.
Neverthless, says Campbell, since the Greek debt crisis heated up, “the euro has held up remarkably well considering what may lie ahead for the Eurozone. A default could quite easily send the euro-dollar exchange rate into a tailspin and sub-parity could become the new norm”.
Default followed by Grexit would end the idea that the Eurozone is unbreakable and could call into question previous assurances by its leaders that they would do whatever it takes to hold it together. Grexit would weaken the euro and bring about the sustained low rate conditions for growth and a change in membership of the single currency, explains Blain. “Greece would not be the only departure, but the club’s core members will bind ever closer.”