The headlines out of Greece are coming fast – deal, no deal, default, referendum, etc. It’s enough to make investors’ heads spin trying to keep up with the news flow. Markets have been volatile this week in reaction to the back and forth, and the rising possibility that Greece may leave the Eurozone. Investors are starting to fear that this could potentially be another “Lehman moment” that results in financial contagion across global markets.
However, regardless of the results of Sunday’s referendum, it’s our belief that the global economy and financial markets are much better prepared to handle a possible “Grexit” compared to a few years ago, for several reasons:
- Greece’s economy is relatively small, representing just 1.5% of European GDP, and a mere 0.33% of global GDP. Meanwhile, Europe’s economy is in much better shape now as opposed to the double-dip recession they experienced in 2012. Not only is the economy expanding again, but it’s actually accelerating through the first part of this year.
- There’s much less exposure now to Greece’s debt and banking system by the private sector following the previous debt restructuring in 2012. Therefore, any additional losses should be much smaller and more easily absorbed.
- Perhaps most importantly, there are meaningful backstops in place that didn’t exist in 2011-12, in particular the European Central Bank’s current quantitative easing program involving the purchase of over 1 trillion euros of European bonds, which could easily be expanded if needed.
So while Sunday’s vote has the potential to create a second round of fireworks this weekend, we don’t think developments in Greece are likely to knock the current bull market off track. There’s certainly the potential for further market gyrations in the coming days and weeks, but once a resolution occurs, financial markets should be able to refocus their attention on a solid global growth backdrop supported by plenty of liquidity still being provided by central banks.
