A Greek exit from the euro is now a “base case” scenario for economists and is set to trigger a flight to safety for nervy investors
Financial markets were braced for their worst period of turmoil since the height of the eurozone crisis three years ago, after Greeks chose to overwhelmingly reject the bail-out terms of their creditors, throwing the country on a collision course with the eurozone.
The prolonged period of uncertainty is expected to roil European equities and see investors flock to safe haven assets such as US and German government bonds.
“Look initially for a general sell-off in global equities, along with price pressures on the bonds issued by Greece, other peripheral eurozone economies and emerging markets,” warned Mohamed El-Erian, chief economic adviser at Allianz.
Greece’s ‘Big No’ is set to ensure the country’s creaking banking system will continue to be starved of liquidity, keeping banks closed beyond the end of their mandated holiday which is due to end on Tuesday.
At least one of the country’s four major banks, Eurobank, has all but run out of cash despite the imposition of capital controls which have limited ATM transactions to €60 a day.
Amid the desperate cash crunch, the Bank of Greece is due request an additional injection of emergency liquidity assistance (ELA) from the European Central Bank. However, with voters rejecting the conditions of the country’s paymasters, the ECB is almost certain to keep ELA frozen at nearly €88.4bn prolonging the squeeze on the financial system.
Finance minister Yanis Varoufakis is due to discuss extending capital controls measures with the Greece’s senior bankers on Sunday night. Greek stock markets have also been suspended since last week.
The ECB however is expected to wait until July 20 – when it is owed €3.5bn from the Greek government before pulling ELA. Should the governing council decide to take such action, Greece will be on the inexorable path towards a disorderly euro exit, warned Barclays.
“This situation could not last more than a few days, beyond which the Greek government would have to decide to take back the control over the central bank of Greece and force it to provide liquidity support to Greek banks, therefore printing de facto another currency,” said Francoi Cabau at Barclays.
Full article: Greek turmoil set to shake global markets out of complacency as sell-off looms (The Telegraph)