Investors have been biting their nails and pulling their hair over the weekend, hoping for a deal between Greece and its international creditors. While hope was once heightened as the deadline approached, optimism has now vanished after Greek Prime Minister Alexis Tsipras called for a referendum on the austerity policies demanded by creditors on Friday midnight.
Greece’s deadline for the US$ 1.7bn debt repayment is tomorrow and the International Monetary Fund’s Managing Director, Chistine Lagarde, told BBC that the IMF cannot provide further assistance to Greece if the deadline is missed. She commented on the referendum that is going to happen at the end of the week that “at least legally speaking, the referendum will relate to proposals and arrangements that are no longer valid.”
Tsipras is now asking the public to decide on the future of Greece in 5 days, when financiers around the table could not figure out what to do in 5 months.
The Bank of Greece recommended capital controls and the government issued a decree that banks should be closed on Monday. Banks in Greece will be closed until at least July 6, and a daily cash withdrawal limit will be set at US$ 66.04. Bank transfers or payments abroad will also be banned, according to Bloomberg.
Thomas Chan, Managing Director at Able Alliance International says the situation is definitely negative. Although the market has been prepared for a default or a GREXIT, when it actually happens it will still elicit market shocks. However, if one takes a rational approach, the outcome may not be as disastrous as the public perceives:
- The Greek economy is very small. According to the IMF, it ranks 44th in the world with a GDP of US$ 238bn
- Greece’s debts are mainly focused on the IMF and ECB, and its debt burden on commercial banks is very light
- It is more likely that Greeks will vote for the government to try and reach a deal in the referendum
The market is reacting quite fiercely because institutional investors will not take the risk, but for individual investors he suggests to wait for a few more days. He thinks the risks of haven assets are high after prices have gone up, because developments in the Greek saga still remain uncertain. “It is too late to go into haven assets, if the situation gets better, their prices will come back down. If investors want security, they should hold cash instead,” he says.
Or, he recommends investors to wait and see. Investors would have to examine the strength of the rebound of assets when things improve. If the rebound is small, it might mean that the fundamental or the quality of the asset is diminished and at that point, it’s worth a sell-off.
Otherwise, investors can start looking into European equities after the Greek crisis clears up, because the low euro helps with exports in many countries in the Union, and company earnings might benefit. The risk of a deep euro depreciation is not likely anymore as the euro is already trading at a low level. BM