Contagion from Greek exit likely to be limited

30 Jun 2015 | Author: | No comments yet »

Contagion from Greek exit likely to be limited.

Greece, you might have heard, is in bad financial shape. A Greek default and exit from the eurozone probably would have limited effects on the region and global economy because of new financial safety nets and European nations’ improving fortunes, analysts say.A wave of financial turbulence overseas could delay the Federal Reserve’s plans to raise short-term interest rates in the months ahead, but only if it ends up knocking the U.S. economy off track.Selling was only done if there was a change in strategy of the business, conditions in the industry had changed, or there were management issues, profits were falling or in danger of falling.The dollar dropped against the euro and the yen, as the latest developments in the Greek debt crisis ratcheted up uncertainty in the financial markets and fueled doubts that the Federal Reserve would increase U.S. interest rates this year.

We’ve been hearing about these problems for years, but it finally came to a head when Germany over the past few weeks said “genug!” — “enough!” — and demanded that Greece make cuts in its government pension system if it wanted another bailout. For him, a savage sell-off with all the headlines about billions being wiped off the value of the sharemarket was an opportunity to add to his existing holdings at a better price, or become a shareholder in a company that he’d had his eye on for a while but hadn’t taken the plunge because the price wasn’t right. Currencies swung as increased tensions between the Greek government and its international creditors over the weekend rattled markets and called into question Greece’s place in the eurozone and the very integrity of the common currency itself. In fact, Greece is just one of a handful of global financial turmoils that could prompt reluctance on the part of the U.S. central bank to start raising borrowing costs for consumers and governments for the first time in nearly a decade. “China, Greece and Puerto Rico all are issues for the Fed. It’s important to note that on the days when shares are up and creating headlines for “good” reasons, think “best day in six months”, or “highest level this year”, he would have the same discipline but could just be easily selling stocks as they got more expensive.

The gyrations sent investors into the yen, an asset investors generally regard as one that retains its value amid bouts of economic or political uncertainty. They reflect a global economy which is not correcting the imbalance between supply and demand,” said Steven Ricchiuto, chief economist at Mizuho Securities. “These problems tend not to surface when the global economy is accelerating, when inflation is rising and wages accelerating,” he added. “So they are reflective of the macro environment that suggest the Fed should not hike rates in September.” U.S. stock markets plunged Monday with the Dow Jones Industrial average down 200 points at 11 a.m. And for weeks, officials in Greece and in other EU countries — off the record, of course — have been spilling the beans that a bailout deal was just around the corner, was being worked on, was near completion or whatever other optimistic phrase that could have come out of the mouth of Pollyanna herself. “Pssst, it’ll all work out,” were the whispers from the bean-spillers, all of whom had a vested interest in making the situation look better than it was. The reality of such an outcome probably would be far more benign. “Countries’ finances are on a much stronger basis,” than they were when Greece teetered near a eurozone exit five years ago, Italian Finance Minister Pier Carlo Padoan said in April.

The biggest fear is that a so-called Grexit would foment fears of similar moves by anti-austerity activists in countries such as Italy, Portugal and Spain. Whether those bets are correct will depend on how turmoil in the euro zone plays into Fed officials’ forecasts for growth, employment and interest-rate increases this year. In one way, that line of thinking is not a lot different from one of Warren Buffett’s most famous takes on the stock market: “To refer to a personal taste of mine, I’m going to buy hamburgers the rest of my life.

That probably would drive up interest rates and borrowing costs in those countries, hobbling their budgets and economies. •The European Central Bank has committed to buying 1.1 trillion euros, or 60 billion euros a month, in government and private-sector bonds by September 2016 to hold down long-term interest rates and pump cash into the region’s banking system. Chair Janet Yellen made it clear in her June 17 press conference that she needed to see “more decisive evidence” of sustainable economic momentum that supports labor markets and gradually firming prices. Greece’s new far-left government has broken off negotiations with Eurozone fiscal leaders, rejecting austerity as the path forward for the debt-riddled nation.

To further push down rates in weaker countries, the ECB could step up the size of the purchases, expand them to other asset classes and impose even less stringent collateral rules, Morgan Stanley said in a research note. •In 2012, the European Union set up a rescue fund to provide loans and financial assistance to debt-wracked countries and recapitalize financial institutions. That sounds like so much fun — a “holiday” — but it means that regular people can’t get at their savings and smaller companies that bank solely in Greece are not able to get the cash they need to operate.

Spain, Italy and Portugal all have returned to growth. •The exposure of European banks to Greece has narrowed significantly, falling to $35 billion from $200 billion since 2010, Morgan Stanley says. A ballooning trade deficit cut 1.9 percentage points from GDP in the first quarter of this year and about 1 percent in the fourth quarter of 2014, the biggest back-to-back drag since the first half of 1998. When stocks go down and you can get more for your money, people don’t like them any more.” But there are a few other concerns on the horizon for shares.

Investors outside Europe continued to exit from positions in eurozone equities and buy back euros they previously sold to shield their stock picks from adverse currency moves, said David Woo, head of global rates and currencies research at Bank of America Merrill Lynch. “If European stock markets go down, investors don’t want to be overhedged and don’t want the currency risk,” Mr. Generally, exposure to Greek debt has shifted from private-sector investors to public institutions, such as the ECB, International Monetary Fund and European Commission.

Greece’s impact “will depend on the market reaction, especially the dollar,” said Mark Spindel, chief investment officer at Potomac River Capital, a hedge fund in Washington with $750 million under management. “We know how sensitive the Fed committee is to dollar strength.” ▪ Financial conditions: Fed stimulus works through financial markets by lowering financing costs on everything from cars to homes. The US Federal Reserve is poised to raise interest rates, economic growth is hardly robust around the world, and the bull market in shares has been going for a quite a few years now, prompting worries it has to have a correction at some point. I’m not certain of the direction of causality between these two things, but this is clearly a factor.” In addition, investors continued to close out those bets that involve borrowing the low-yielding euro and selling it to fund trades for riskier, higher-yielding emerging-market currencies. But the contagion isn’t likely to spread outside of Greece to other European nations such as Portugal, Spain and Ireland which were also threatened recently by massive debts.

And if I had to guess, if Greeks vote no on the austerity measures and the EU somehow bails it out anyway, then Italy, Spain, Portugal and other beggar nations will quickly line up for their handouts. Fed officials “need to see where mortgage-backed security spreads and corporate spreads are to Treasuries” and what happens to stocks, which influence consumer confidence and spending, said Michael Gapen, chief U.S. economist at Barclays Capital Inc. “Those are your primary starting points” as a policy maker, Gapen added. The timing of all this international turmoil is poor for U.S. central bankers eager to ‘normalize’ U.S. monetary policy after years of unprecedented stimulus in the wake of the 2008 financial crisis. U.S. labor markets have tightened considerably in the past 12 months, reducing the so-called slack that had kept wages stagnant and inflation well-below the Fed’s 2% target rate. Still, investors were hopeful the central bank would step in to keep the effects of the crisis from spreading and provide liquidity if necessary to hold the monetary union together. “The ECB has the firepower and the will to keep the euro from breaking apart,” said Josh Feinman, chief global economist at Deutsche Asset and Wealth Management, which oversees $1.25 trillion. “They’d step in guns blazing if this appears to start falling apart.

The market is taking reassurance from this.” The asset manager has bets that the euro will weaken against the dollar over the next year and is betting that Greeks will vote “yes” in the referendum, Mr. But all of the market uncertainty prompted by the latest Greek crisis clearly has markets on edge, and the Fed will be understandably cautious about throwing more uncertainty into a fragile marketplace by raising rates in September. A stronger dollar—driven by investors moving into safe-haven U.S. assets—could push down the price of imported goods and inflation while hurting exports, growth and hiring. The dollar’s rally halted after soft U.S. economic data during the first three months of 2015 raised doubts in the market that the Fed would tighten monetary policy. The Fed’s projections released June 17 showed officials split over their rate expectations for 2015: Five expected one rate increase, five forecast two increases, five saw three moves and two didn’t want to lift rates at all this year.

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