TO GREXIT, OR NOT TO GREXIT, THAT IS THE QUESTION
The BlackRock Investment Institute, one of Russell Capital’s valued research partners, hosted a panel this morning addressing the recent developments in Greece and the potential impact on the global financial markets. BlackRock’s global research and investment managers offered commentary on what the breakdown of talks between Greece and its creditors could mean for the ongoing relationship of the European Union, the implications of the Athens Stock Exchange closure and introduction of capital controls, and finally, what to expect over the coming days and weeks. The panelists’ comments were very insightful and mirrored many of the opinions held at Russell Capital.
The main consensus among panel participants, and the main takeaway from the meeting, is that whatever the outcome of the referendum on July 5th, there will be little lasting impact on European markets, as well as for investors outside Greece. Whatever the outcome, Greece will be in default because they have a $1.9 billion payment due on June 30 to the IMF which they will not be able to meet. If a solution is not forthcoming, the cascading effect could cause them to default on their entire $360 billion of debt. The referendum asks for the Greek people to vote to either go along with the austerity programs the Troika (the European Commission, International Monetary Fund and European Central Bank) is demanding for Greece to receive more bailout money (“Yes” Vote), or to not go along with it (“No” Vote) and suffer the consequences of having to leave the European Union and defaulting on $1.9 billion of debt to the IMF.
The panel offered a couple of different observations and/or explanations, citing recent European investor behavior during this crisis of “investing for risk avoidance rather than opportunity”, and Greece’s small economy and GDP as the main factors (increasing bond spreads are an indication of this flight from risk). As long as the impasse with the European Troika and Greece continues, investors will continue to invest for risk avoidance, which is providing investment opportunities in the European markets. BlackRock also hypothesized that regardless of the outcome, the European equity markets will go up, and we’ll see a strengthening of the Euro unless the impasse drags on. The European banking system should not be affected, as they have strengthened their balance sheets since 2008. The European economy has improved, as the banks have increased their lending since the implementation of QE (quantitative easing) on January 1, 2015.
If the referendum vote is “NO”, the opinion voiced by Blackrock is that the Quantitative Easing program currently in place in Europe will become “incredibly aggressive”. If Greece exits the EU, there is a risk that they may turn to Russia; the US has military installations in Greece. There is a very large influx of illegal immigrants into Greece which could cause political and social upheaval.