The Greeks have voted no in the austerity referendum - but what does this momentous decision mean for trustees?
The economic situation in Greece has been unstable for years and the country has spent six years in recession, but recently it missed a debt payment and as a result the banks were forced to close amid fears of currency shortages. President Alexis Tsipras called for a referendum to find a solution.
The referendum on Sunday resulted in a momentous “no” vote to austerity, which could be interepreted as a rejection of the euro. However, the Greek people were only directly voting on whether to accept the latest deal offered to them by international creditors, not on membership of the eurozone itself.
Despite the Greek people’s suffering and a widespread dislike of the European program, many strongly oppose leaving Europe altogether.
“We know what Greek voters have rejected. We don’t know what they have voted for, exactly—and neither does anyone else,” says Stephanie Flanders, J.P. Morgan Asset Management’s chief market strategist for Europe.
“The surprisingly emphatic victory for the “no” camp in Sunday’s special referendum in Greece has strengthened Syriza’s domestic political standing—and also made negotiations with the country’s European creditors over a new support package for Greece a lot more difficult,” says Flanders..
Europe would have given Greece more financial relief in exchange for meeting its austerity demands. A “yes” outcome would not have promised stability, but would have meant that the banks could have reopened after less time.
There is the threat that Greece may have to leave Europe as it is are unable to pay off its debts, the banks may collapse and Greece may be forced to introduce a new currency, which could have disastrous effects for its economy.
The worth of the pound has now increased to €1.337, which has increased within only eight weeks from €1.25, therefore spending in Europe will be 15% cheaper in 2015 than in 2013.
What does it mean for trustees?
A “no” vote for austerity will mean more market uncertainty as banks remain closed, and Greece’s euro exit seems more likely.
In the short term the markets are likely to be volatile – the FTSE 100 fell around 2% on Monday morning. Thus far, however, Europe’s markets have held fairly steady.
“Europe’s economy has not been seriously affected by the Greek crisis so far. We can say the same for European financial markets,” says Flanders. “There has been a “risk-off” mood in markets since the referendum was called, but the spread between periphery and core sovereign borrowing costs is still far below previous peaks and has not been hugely affected by the crisis. Meanwhile, the Libor-OIS spread—which has spiked in previous crisis periods—has not moved at all.”
If Greek were to leave the euro, it would set a dangerous precedent for the rest of the eurozone and could result in more turmoil further down the line.
“We can expect this to cause volatility and sell-offs in European markets and potentially very serious long-term political implications for Europe. However, assuming that policymakers respond reasonably decisively to signs of contagion, we do not currently believe the result poses a broader risk to European investors or the European recovery,” says Flanders.
Trustees could take advantage of market volatility by buying stocks while they are cheaper – they may well fall further over the coming weeks, but could recover over the longer term.
“Over this period equities still look like a decent bet compared to cash paying close to zero in interest, and gilts yielding 2%,” says Laith Khalaf, senior analyst at Hargreaves Lansdown.
“When you consider the factors that influence stock price movements over the long term, it’s important to remember that macroeconomic events play a small supporting role to fundamental, company specific drivers,” says Paras Anand, head of European equities at Fidelity Worldwide Investment. “I believe the risk of contagion to the wider financial system remains modest”.
German chancellor Angela Merkel and French president Francois Hollande will be meeting in Paris on Monday afternoon, and will then release a joint statement. The European Central Bank will also meet to decide whether or not to extend their agreement with Greek banks further, which would allow them to re-open. The eurozone’s leaders will be meeting on Tuesday to discuss their reactions to the Greek referendum.
Trustees should monitor developments and discuss with their advisers to see if there are any attractive opportunities in the equities space.