Greece’s possible exit from the Eurozone will have limited long-term effects on the financial system, according to asset managers.
Market reaction to the news that 61% of the debt-ridden country’s population voted against a new bailout deal on Sunday was muted, industry experts said yesterday. This is despite the vote being likened by many commentators to a referendum on Greece’s membership of the Eurozone.
Negotiations over debt restructuring and possible further bailouts could continue for some time, fund managers said.
“We are surprised that the moves have been so modest and continue to believe that market participants are optimistic,” Columbia Threadneedle Investments said in a blog. The asset management firm said it continued to forecast an uptick in European economic growth that would withstand Greece’s ongoing debt crisis.
“Market reaction this morning has been muted. We are surprised that the moves have been so modest and continue to believe that market participants are optimistic.” —Columbia ThreadneedleBlackRock also expressed similar sentiments and said the general selloff in global equities and “so-called ‘safe haven’ bonds” was modest compared to the European debt crisis in 2012.
While the referendum vote is likely to encourage further selling, the firm continued that the monetary environment and low bond yields would help soften the blow.
Valentijn van Nieuwenhuijzen, head of multi-asset at Netherlands-based NN Investment Partners, said the likelihood of contagion across other Eurozone member states was “significantly lower than it would have been two, three, or four years ago.”
“The willingness and ability of policymakers to fight off contagion is much higher than in recent years,” van Nieuwenhuijzen said. “There is a higher willingness than ever to support peripheral countries that are willing to play by the rules.”
TIAA-CREF also had positive outlooks for European institutions, aided by the offloading of most of its Greek exposures, and said the European Central Bank (ECB) would be able to prevent a massive contagion using “a wider range of liquidity tools in its arsenal.”
“The willingness and ability of policymakers to fight off contagion is much higher than in recent years.” —Valentijn van Nieuwenhuijzen, NN Investment PartnersHowever, with Greece struggling to raise funds to repay up to €3.5 billion ($3.8 billion) to the ECB on July 20, asset managers admitted that the increased likelihood of a “Grexit” could have a less-than-ideal impact on the European economy and assets.
Schroders argued that if Greece were to default on the loan, the ECB could cut the country off from its emergency liquidity assistance.
“Assuming Grexit plays out, we would expect a 50% devaluation in its new currency,” the British firm said. “This is likely to plunge Greece into a severe recession. For the rest of the Eurozone, we would expect a slowdown over the rest of the year.”
Even if the ECB is able to “combat market nerves,” investors are likely to become more risk-averse in investing in sovereigns and businesses, Aon Hewitt said.
The firm added that, in a worst-case scenario, Grexit could “put a dampener on the outlook for European equities and debt,” weaken the euro, and put stresses on global markets.
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