1 July 2015

As you can imagine, clients are asking a lot of questions about the events unfolding in Greece. There’s been plenty of column inches devoted to the sequence of events so far and the situation is still very fluid at the time of writing, so in this post I’ll focus on the key reactions we are monitoring closely in relation to the crisis.

1. European Central Bank (ECB) reaction

We’ve seen plenty of volatility in European bond and equity markets this week; how far will the ECB go to intervene and calm troubled waters? Could there be an acceleration of its quantitative easing programme? The latest European Court of Justice (ECJ) ruling on the legitimacy of Outright Monetary Transactions (OMT) suggests the ECB could have the leeway to react strongly. We expect that there will be an ECB statement to curb volatility and, if this fails, more direct intervention. In the event of a no vote in the referendum we anticipate the ECB being vigorous in its defence of the Economic and Monetary Union.

2. European Commission (EC) reaction

François Hollande, the French president, Jean-Claude Juncker, the president of the European Commission, and Matteo Renzi, the Italian prime minister have already made statements suggesting the referendum vote is in fact a vote by the Greek people to stay in the European Monetary Union (EMU). Angela Merkel, the German chancellor, has been less dogmatic, but it will be interesting to see whether that stance holds and what other leaders have to say as the vote approaches. Whatever statements are made in the run-up to the referendum, there may be some resistance from European leaders to picking up negotiations where they left off with Greece regardless of the outcome of the vote – the deposit withdrawals over the last couple of weeks have deepened the hole in the Greek banking system, so any new package for Greece will have to include new money and a number of further approvals by European parliaments.

3. Greek-population reaction

We are watching to see how social unrest – and Syriz's popularity – changes now that the banks are closed. The Greek government has no cash left; the latest round of wages and pensions payments will either not be made or will be paid in IOUs, which will undoubtedly aggravate tensions. Local polls will likely be important for market moves this week.

4. Greek-politician reaction

It’s difficult to predict what will happen post-referendum, but a regime change in Greece would be significant. We are monitoring statements from opposition leaders closely. Markets may also react if the current government seek a return to the negotiating table and appear to make any concessions to the creditors’ demands ahead of the vote.

5. Market reaction

As we’ve seen already, we should expect short term volatility across European markets, the extent of which will be driven by how long the banks stay shut and how likely a deal looks.

The European banking system has massively reduced its exposure to Greece so there is no immediate danger to the system. European companies broadly have very little exposure to Greece. Assuming a policy response by the ECB, the overall economic impact should not be more than a few basis points off growth and inflation in the rest of the eurozone, but there will likely be a negative, knee-jerk reaction in equity markets.

We still believe double-digit earnings growth accompanied by continued loose monetary policy provides a supportive mix for European equities. It’s also worth remembering that Greece is considered an emerging market by index-provider MSCI – and so does not count in the reference benchmark of our pan-European Funds. For our Europe ex-UK funds, Greece counts as only 0.1% of the benchmark (Source: FTSE Indices, as at end May 2015).

CARS ref: RSM-1444
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy. The opinions expressed are as of 30 June 2015 and may change as subsequent conditions vary.

We still believe double-digit earnings growth accompanied by continued loose monetary policy provides a supportive mix for European equities.