Of late, stock markets globally are paying close attention to the situation in Greece as talks between Greece and their creditors continue trying to reach an agreement in relation to the Greek debt crisis. Eric Lascelle, Chief Economist for RBC GAM has put together an update which is provided below.

Greece: The Ongoing Arm Wrestle

Talks broke down between Greece and their creditors over the weekend, a notable development as Greece’s June 30th repayment deadline to the International Monetary Fund (IMF) looms. With these recent headlines, the question has shifted from “What terms will they agree to?” to asking, “Has the probability of a Greek exit from the Eurozone grown?”

Let’s start by refreshing ourselves on the situation. Greece has been in debt to the IMF since 2010, when IMF funds bailed Greece out of its financial crisis and prevented Greece from a technical default. Now, the two groups are having difficulty coming to an agreement on how the debt should be settled. Though both sides have agreed on lesser issues, there has been much disagreement over some of the bigger polices to be implemented – including labour market liberalization, pension reforms and fiscal consolidation.

Earlier this month, Syriza, the Greek political party in power (elected in January) was divided on whether a deal should be made with the IMF, or if Greece should break off from the Eurozone. At the time, Greece’s potential exit from the Eurozone was feared but not a probable reality because the consensus across Greek Parliament suggested that a deal should be struck instead.

The Greek Arm Pushing Back

Most recent negative headlines come as a result of pushback by Alexis Tsipras, Greece’s Prime Minister, who feels the creditors do not want to negotiate anymore. This leaves some concerned that Tsipras may actually want to exit the Eurozone. Others feel this is an assertive attempt by Greece to get the creditors to admit their bluff.

Perspective from Eric Lascelles

Eric Lascelles, Chief Economist for RBC Global Asset Management, recently spoke on the subject to provide the following perspective:

  • Sometimes a shock, like a technical default or capital controls imposed on Greek banks can spur an agreement to be reached.
  • Pressures are important and exist – The EU officials formally discussed a Greek exit after the IMF acknowledged the possibility last month, suggesting a risk that Greece could ultimately leave the Eurozone.
  • Contagion concerns for other countries and economies are actually quite small. This is because very few international private-sector investors now own Greek debt. Thus, the main channel of concern is simply that other countries could themselves elect Euro-skeptic governments and follow a similar path out of the Eurozone.

In conclusion

It is seen as likely that Europe will stick with their more strict policy proposals, as pressure is mounting from other members to European Union (most prominently Germany) to let Greece exit. This type of arm wrestling between political bodies, countries and their banks can sprout fears in the markets. Whenever there are fears, there are also opportunities, and with that in mind, our Portfolio Managers are keeping a close eye on these events to take advantage of opportunities that arise in shifting markets.

Leave a reply