Greece’s sizeable financial woes and potential exit from the eurozone are unlikely to trigger a flow-on effect to Australia’s economy of the same magnitude as 2008’s global financial crisis (GFC) or worse, senior investment managers said.
Fidelity Worldwide Investment portfolio manager Kate Howitt said during the GFC there were a lot of ‘weak holders’ of equities, or people who chase returns, who were significantly affected by the economic downturn. However, if Greece’s financial woes force its withdrawal from the eurozone, it is unlikely to result in a secondary GFC.
As a general principle, markets dislike uncertainty – so when there is some level of uncertainty or an unknown outcome, markets will move to price in the worst case until proven otherwise, Howitt told InvestorDaily.
“When the market periodically refocuses on the problems in Europe – and [the] risk of the breakdown of the currency union – the market, I think, keeps reverting back to the Lehmann failure and the ceasing up of the financial plumbing of the world economy,” she said.
“So I think we are seeing a bit of that being priced in. How that played through with Lehmann’s was that [Australia] had a breakdown in the level of credit financing which finances the majority of Asian trade and most of the commodity trade, especially at the smaller end.”
Howitt said another way the fallout could close out is through “global growth shock”.
“So the issue there, of course, is that commodity prices are set by the intersection of supply and demand. So, if demand is weaker but supply keeps coming on the prices are going to go down – and therefore lower earnings for the miners, lower terms of trade for Australia, lower GDP, lower tax debt [and] that would flow through fundamentally,” she said.
Another way that it would flow through would be in a general risk aversion, she said.
“There should be a lot less lose money in the market that could get shaken out in a new downturn. So, you could see a grind-down but it’s hard to [predict happening], even if you do have a big shock to the plumbing of the world economy. It’s hard to see how you’d really have the magnitude of what you saw in 2008,” she said.
AMP Capital head of investment strategy Shane Oliver said Greece’s potential exit raises concerns there would be fear of “contagion” to neighbouring European countries, such as Portugal, Spain and Italy.
“This is why bond yields in these countries have been under so much pressure,” Oliver said.
“On this front Europe’s firewall fund has been enhanced and so too has the bailout firepower of the IMF. The ECB could also aggressively buy bonds in vulnerable countries.”
“However, the issue will be how quickly Europe moves to protect these other countries in the event of a Greek exit. If it moves too slowly then a Greek exit could be similar to a Lehman event.”
Oliver said, from an Australian perspective, the exit will force the Reserve Bank of Australia into further rate cuts.
HSBC Bank Australia global head of FX strategy and team David Bloom said there is now a difficulty in deciding the path forward, due to the high degree of “uncertainty surrounding not just the likelihood of Greece leaving, but what the ramifications of any such exit might be, with a veritable kaleidoscope of opinions.”
“In the current uncertain environment, the danger is to become too embroiled in the complications of all the eventual outcomes,” Bloom said.
“Understanding the detail is vital, but it only makes sense to examine the detail when we have a sense of what the broader questions might actually imply for the euro.”
Late last week, Fitch Ratings downgraded Greece’s long-term foreign and local currency issuer Default Ratings (IDRs) to ‘CCC’ from ‘B-‘.
The short-term foreign currency IDR has also been downgraded to ‘C’ from ‘B’. At the same time, the agency has revised the Country Ceiling to ‘B-‘.
“The downgrade of Greece’s sovereign ratings reflects the heightened risk that Greece may not be able to sustain its membership of Economic and Monetary Union (EMU),” the ratings house said in a statement.
“The strong showing of ‘anti-austerity’ parties in the 6 May parliamentary elections, and subsequent failure to form a government, underscores the lack of public and political support for the EU-IMF EUR173bn programme.”
