The market verdict on Greece

By Nicolas Vinocur

Stocks and euro down but Greek government bonds take the real hit.

European politicians have downplayed the impact of a Greece exit from the euro zone, saying it won’t be a repeat of the 2009 crisis. The markets’ verdict is in, and it appears they are right — at least as far as sovereign debt prices are concerned.

The euro currency fell to about $1.10, reflecting anxiety about the outcome of a July 5 referendum on whether or not Greece should accept its creditors’ conditions for further financing. Still, the level was above the euro’s level on June 1 (around $1.09) and well above its March low of $1.05.

Heavy buying of safe-haven values caused the Swiss franc to reach its highest level in almost four weeks against the euro, prompting the Swiss National Bank to intervene overnight to curb gains. 

Stock markets also suffered. After dramatic overnight sell-offs in Asia, European indices plunged in early trading, with Frankfurt’s DAX 30 falling more than 4 percent and the main share markets in Paris, Madrid and Milan all down by the same amount.

Foreshadowing similar declines on across the Atlantic Ocean, U.S. equity futures dropped sharply and bond futures rallied on Sunday. Asian stocks also fell sharply despite the Chinese central bank’s monetary easing on Saturday.

Further afield, emerging markets also felt strain emanating from Greece. In Poland, which joined the European Union in 2004, the zloty currency has sunk slightly versus the euro since Greece announced its referendum. Poland’s central bank said it could intervene if the unit weakened further.

But do such market gyrations mean that Europe is headed into a full-blown repeat of its sovereign debt crisis of 2009-2010?

The short answer is “no” — at least not for now.

While markets are jittery and confidence has been shaken, economists argue that investors’ attention this time around is focused squarely on the Greek debt problem, and much less on the sustainability of government debt in “peripheral” eurozone members such as Portugal, Ireland and Italy.

“What we’re talking about here is not contagion, but pollution,” said Dominique Barbet, an economist at BNP Paribas bank in Paris. “We’re not even remotely in a scenario where Portugal would leave the euro.”

Five years ago, doomsayers frequently cited Portugal as the next most vulnerable eurozone state after Greece. But the interest rates on benchmark Portuguese bonds have only risen by some 20 basis points, or hundreds of a percentage point, in the midst of the current crisis, while rates on Italian and Irish bonds have moved even less.

Only Greek government bonds — with interest rates 15-17 times as high as Germany’s — bore the full brunt of investor anxiety.

The more measured reaction is partly explained by the fact that private owners of Greek debt in France, Germany, Italy and Spain already saw their investments written down severely three years ago when most of them agreed to take a “haircut” — and have since greatly limited their exposure to Greece. In that sense, a Greek exit from the eurozone has already, to a large extent, been “priced in.”

Equally reassuring for investors: major advances made by the eurozone to fend off market panics, which include the creation of the European Stability Mechanism, the European Central Bank’s decision to pump liquidity into the system, as well as the eurozone’s Banking Union. 

 “Where the losses have not yet taken is at the level of states,” said Barbet. “They did not participate in the haircuts, and are very much expecting to be reimbursed when their loans next come due, on July 20 and August 20.”