Negotiations between Greece and its creditors broke down over the weekend. With banks being closed, capital controls put in place and the Euro currently trading at 1.0973, down and through important technical support, the outlook for markets is as uncertain as it has been for a couple of years.
Marc Chandler, one of the globe’s best regarded currency strategists, characterised the decision of prime minister Alexis Tsipras as the actions of an “inexperienced Greek government” taking “a reckless political gamble.” The FT also took aim at Tsipras saying his plan has already failed:
“His tactic has already come unstuck because the eurozone has refused to consider extending their bailout offer to the date of the poll. By Sunday, when the referendum votes are due to be cast, there may be no deal on the table to discuss.”
It seems that once again it will be up to central banks to step into the political breach to backstop global finance.
Already this morning Emma Lawson, NAB’s Sydney-based currency strategist wrote that markets must “watch for official measures to ease risk concerns.”
Lawson said the Fed has reminded markets of their FX swap arrangement with the ECB. “This is to ease demand for USD in periods of stress; expect similar statements from other central banks,” she said.
It’s a theme picked by Morgan Stanley’s Andrew Sheets, who wrote that the level of contagion — how much Greece will effect other markets — “will hinge on the ECB.”
Sheets said the market will focus on two things:
- What this means for the euro (a currency of an economy as large as the US) and;
- Will this shock Europe’s banking sector or sovereign yields, causing contagion throughout the region?
Sheets said the ECB is central to both with Mario Draghi’s 2012 commitment to do “whatever it takes” to turn the fortunes and tides of sentiment towards Europe and the Euro.
But Lawson said, “The question is — if there is no extension nor agreement with the Institutions, then will the ECB continue to provide ELA? The ECB and the Eurogroup has noted that they will ensure the stability of the Euro area (not Greece per se).”
Sheets says that even though the “ECB’s power to keep Greece in the euro may be limited (given how much of that decision lies elsewhere),” Draghi and the bank have an important role in putting a lid on contagion to other markets.
“The most plausible way for a small economy like Greece to impact global markets is through a sharp increase in risk premiums for eurozone banks and government bonds, leading to losses and tighter financial conditions. Forceful action this week, even if only verbal, could do much to counteract this, both directly (as a promise of future buying) and indirectly (as a signal to not ‘fight’ the bank’s desire to maintain easy financial conditions).”
It’s not the first time Mario Draghi, Janet Yellen, Mark Carney and Glenn Stevens have had to step in to fill a political void around the world and rescue the global economy and finance.
Fears of Greek contagion may, in the end, prove overblown. But at least we know central banks have had some practice at these types of rescues over recent years.