Money managers and economists are increasingly convinced of a Greek exit from the eurozone, following a decision by the Greek people to reject a European Union-imposed austerity proposal.
Markets, however, have not been affected in the way executives would have expected.
The Greek population spoke Sunday in a referendum, called by Prime Minister Alexis Tsipras, which asked them to vote for or against increased austerity proposals. More than 60% voted against, which money managers said opens up the potential for a so-called Grexit.
Market reaction has been muted, said executives at money management firms, with small moves over the day, said Wouter Sturkenboom, senior investment strategist at Russell Investments, in a telephone interview. “This morning I thought was pretty telling. Obviously markets went down, which is an appropriate response to a risk event, which it is.”
The market fall was less than in previous cases of reaction to news out of Greece, such as the initial call for the referendum last month, Mr. Sturkenboom said. “That tells you that the expectation in financial markets and potential impact on eurozone recovery, growth and contagion is very limited. And that is right and what it should be.”
The Euro Stoxx 50 index was down 2.22% Monday and was down 2.93% vs. the June 29 close. Since June 8, before the referendum was called, the index is down 2.76%.
The European Central Bank is also playing an important role behind the scenes when it comes to the market reaction. “Another reason markets have been relatively sanguine, although are lower, (is that the ECB) has been so vocal of its support of eurozone markets, telling us over and over again that if need be, it will step in and prevent contagion,” Mr. Sturkenboom said.
There is further potential for market moves, however. Money management executives said they will be watching for news from a meeting Monday night between French President Francois Hollande and German Chancellor Angela Merkel, and an emergency euro summit Tuesday, which will discuss the next moves for Greece.
Russ Koesterich, chief investment strategist for BlackRock, said in a phone interview that “investors are taking a measured stance on this” for a number of reasons.
One reason is that a deal might still be found despite the referendum. Another is because “the ECB is in a good position to manage any contagion beyond Greece,” Mr. Koesterich said.
“And while a Greek exit would be traumatic in the near term, given that Europe is on more stable ground and given that the European Central Bank is on more stable ground, it wouldn't represent an existential threat to the global economies or financial markets. Is this another Lehman-type moment? Probably not.” he added.
Mr. Koesterich said that for now, investors are waiting to see what happens to the Greek banking system, and what the opening positions of Greece's creditors will be following the referendum.
Eric Chaney, chief economist and head of research at AXA Investment Managers, said on a call Monday that the large size of the “no” vote was unexpected, but that moves by the Greek government in advance of further negotiations, including the resignation of Greek Finance Minister Yanis Varoufakis, were positive.
“I'm not going to make a bet between a successful negotiation on a third bailout, and a Grexit,” Mr. Chaney said. “It is almost impossible to say at this stage. We consider that we should be ready for both outcomes.”
In a note Monday, Eric Lascelles, chief economist at RBC Global Asset Management, put the chance of a Grexit at around 60%. In May, Mr. Lascelles told Pensions & Investments the chance of a Grexit was 25%.
In an e-mail, Richard Benson, managing director, co-head of portfolio investments, at Millennium Global Investments, also put the chance of a Grexit at 60%.
Mr. Sturkenboom said the potential for a Grexit depends on Greece's stance at the discussions Tuesday. “Greece's negotiation position will be very important,” he said. Demanding debt restructuring talks before a deal is negotiated would increase Russell's Grexit probability to 60% to 70%. Demands for significant concessions would put chances of an exit at about 60%, while continuing talks from where they were left prior to the referendum, “something probably eurozone politicians can work with, and be more amenable to,” would lead to a Grexit probability of 40%, he said.
James Comtois contributed to this story.
