Crisis in Greece

The news that has the greatest impact on the economy and the trends that could be adopted by the financial services sector are those related to the still-stagnant negotiations between the creditors of Greece and the government of that country.

Up to the end of the month of April, the situation is described as confused, meaning that no one knows precisely how the market will react in case Greece defaults and if it had to abandon the use of the Euro. If by May 12, 2015 no agreement is reached, Greece, currently with its government coffers practically empty, will not receive the pending payments from the rescue fund and will very likely enter in default on its obligations and forced to leave the Eurozone.

Until today, two visions or opinions have prevailed between the investors in case this happens: on one hand, the implosion or chaos of the European banks and a widespread panic in the European bond market; on the other hand, the belief that effective actions taken by the European Central Bank will allow such calamity for Greece to be manageable within the context of rest of Europe.

However, the matter may not be that simple. Since the previous Greek crisis in 2011/2012, when there were banks identified as being in risk of collapsing for being the biggest holders of Greek bonds, the situation has changed as such banks diminished their risks by diversifying their portfolios. Now, the worries are about the possible domino effect of a default in Greece. This is because the investors around the world are always seeking greater yields, based on the fact that there are signals of the European recovery and with hopes for it to be strengthened by the intervention of the European Central Bank to acquire large sums of sovereign and private European bonds. They turned towards purchasing billions of euros in stocks and bonds of other equally indebted European countries, such as Spain, Italy and Portugal.

Then, in the middle of these stagnant negotiations, different claims come forth: some, the Greeks, with their Minister of Finance at the head, suggest that, in order to get the water to their mills, meaning, to have their proposals accepted as basis for the agreement, that a Greek default and subsequent exit of the Euro will generate an economic shock and widespread costs for Europe of over a thousand billion Euros. On the other hand, the others, meaning the civil servants of the creditor countries and members of the “troika” (European Central Bank, European Commission and International Monetary Fund) reject that argument as fearmongering, as they say, that Europe has prepared for such an event with the creation of a Rescue Fund of 700 Billion Euros and the fact of the notable improvement of their banks. Many factors of different types also appear, such as the approach of Russia towards Greece to get their dissent within the European Union, that requires the approval from Greece to renovate the extensions of the economical sanctions towards Russia for their aggression towards Ukraine, a situation that could mean the advance of Greece to the orbit of the economic bloc of the countries lead by Russia. In this possible, but unlikely scenario, given the weakened Russian economy caused by the drop on oil prices, Greece would not need support from Europe for the viability of its existence as a Nation.

This difficulty to reach agreements between the Greek government and creditors has deep roots. The Greek majority that elected the current governing group did so in response to its promises of ending immediately the vicious cycle of “austerity, misery and pillaging”. Their priorities are paying salaries and covering pensions. They agree with the creation and increase and better management of taxes, divesting on inefficient companies and services, but not in accepting the hated austerity measures, based on the mandate received by their constituents, who they offer to consult via referendum, if the agreement requested by their creditors surpasses such mandate.

Given this counterpoint, as stated by the expert Eric Dor, from the French School of Management IESEG, it would be surprising that the main creditors of Greece, which are the rest of the European countries, with a current exposure of 318 Billion Euros that have been lent to Greece, a much greater amount to the loss that would be incurred by the private holders of sovereign Greek bonds, would risk such an amount by allowing or fostering a default in Greece and an eventual exit from the Euro by denying this batch of rescue credit of 7.2 Billion Euros, for defending economic principles that also have not proved their general efficacy. Perhaps for what was stated, the Greek bonds improved their price in the market.

Ultimately, if this last thing prevails, namely that Greece achieves a soft agreement, meaning that it will receive the pending disbursement with no obligation of continuing the extreme austerity measures, the markets will continue trending up: European stocks as well as sovereign and private European bonds will continue to gain value.

With this scenario, in April, the indexes of American stocks (Dow Jones, S&P 500 and Nasdaq) had small rises; European stock exchanges closed with very small decreases; and Asia’s closed with rises above 2%. In the credit markets, those from European countries barely declined in prices, as did the bonds from the American Treasury.

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