Greece...the ‘No’ vote and implications
On Sunday 5 July, Greece held a referendum on the terms the creditors offered for the latest bail-out package. The referendum results have been confirmed with 61.3% voting to reject the bailout offer. Ahead of the vote, the Greek Prime Minister, Alexis Tsipras; stated a ‘No’ vote would give him a stronger bargaining position to go back to the EU authorities to try and negotiate a third bail-out package (now that the second bail-out package has expired).So far, there has not been any official response from the EU authorities (i.e the European Central Bank (ECB), the EU Commission and the leaders of the major EU nations) and at this stage, it appears that the leaders of Germany (Angela Merkel) and France (Francois Hollande) will meet for a dinner meeting on Monday 6 July and that there will be an emergency summit of EU leaders on Tuesday 7 July to discuss the next steps.
What does the ‘No’ vote mean for Greece’s place in the EU
It still isn’t clear if the ‘No’ vote will result in a Greek exit from the EU– and indeed, both the government of Greece and (most) other national leaders continue to state that they want Greece to stay within the EU.
But the risks of a disorderly exit for Greece from the EUR have now risen sharply. It would seem that the EU authorities would be very reluctant to set a precedent for Greece that involves some sort of debt forgiveness, as other EU nations that have had to implement difficult reforms (i.e. Ireland, Spain and Portugal) could be justifiably aggrieved that Greece ends up with a ‘better’ deal.
The Greek government is clearly stating, however, that some type of debt restructure must be part of any agreement.
What next for Greece?
Any subsequent bail-out package for Greece is likely to take weeks to negotiate – rather than days. The ECB is set to hold a meeting on Monday 6 July to decide on the next course of action. Of critical importance to the ECB (and to Greece) is the ongoing provision of Emergency Liquidity Assistance (ELA) by the ECB to the Greek banking system – via the Greek Central Bank.1
Greek banks could be expected to remain closed until the ECB makes some decision on ELA funding.
The next critical date is the 20 July 2015. On that day, there is the maturity of a €3.5bn Greek sovereign bond, which is currently held by the ECB and other national central banks that was purchased through the Securities Markets Program. Greece, however, does not have the money available to repay this debt and so a third bail-out package or at least some sort of short-term funding arrangement will likely need to be in place by 20 July, at the latest.
It is also important to note that only about 12.6% of all Greek debt is held by the private sector – following the 2012 bail-out package. So this really is an issue for the IMF, the ECB, the European Financial Stability Facility (EFSF)/European Stability Mechanism (ESM) and other European authorities.
Impact on broader markets
Although not directly affected, the impact on global financial markets and confidence from developments in Greece and the EU will likely be a factor than many other Central Banks will need to consider.
CFS products with direct exposure to Greece
There are only a handful of investment options we offer across our investment, super and pension products that have exposure to Greece. Typically this exposure is less than 0.20% of the portfolio and in no case exceeds 0.80% of the portfolio. Please speak to your financial adviser or call us on 13 13 36 if you would like more information on a particular fund’s exposure to Greece.
If you would like more information, please speak to your financial adviser or call us on 13 13 36, Monday to Friday, 8am to 7pm, Sydney time.
1Emergency Liquidity Assistance (ELA) is a Eurozone program that allows banks without eligible collateral for European Central Bank loans to obtain loans from their own national central bank (NCB).
Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) is the issuer of super, pension and investment products. This document may include general advice but does not take into account your individual objectives, financial situation or needs. You should read the relevant Product Disclosure Statement (PDS) carefully and assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision. A PDS for Colonial First State’s products are available at colonialfirststate.com.au or by calling us on 13 13 36.