As the Greek crisis takes one twist after another, we are heading towards a vote this Sunday with little idea what it will actually mean in practice if it does go ahead. Will we be materially further forward whatever the result? Arguably, not given that the vote is on a plan no longer on offer and a new bailout programme will need to be agreed in hostile parliaments up and down the eurozone.
It’s also not clear whether a yes or a no would be best to give a speedy resolution. “Yes” won’t end the crisis and “no” doesn’t immediately mean a Greek exit. A “yes” would of course be well received by other governments and should be a green light to start negotiating a new deal. Given that the Greek Prime Minister, Alexis Tsipras, said he will resign if the vote is “yes”, eurozone governments may be negotiating with a temporary technocrat government, which many would no doubt prefer!
On the other hand, while a “no” would leave Syriza in charge, it would also show the scale of democratic opposition to the proposals and keep everyone focussed on making a deal rather than a political point. Nonetheless, according to David Hutchings, head of the European Investment Strategy team: “On balance, negotiating a deal is likely to be easier with a new government so a “yes” vote may be the better outcome. Questions would of course remain over whether any deal a technocrat government agreed was the best deal or just another exercise in can kicking but one way or another, serious negotiation is needed. Greece’s debt burden has to be reduced if it is not to be a slave to interest payments but serious structural reforms are also needed to deliver sustainable growth to make Greece a safe, rewarding place to invest.”
The impact on financial markets
To date markets have been relatively sanguine, with the modest increase in the bond premium for Spain, Italy and Portugal nothing on the scale of past crises. However while we are told everything is different to 2012, human nature and the ability of fear to take hold have not changed – so contagion should not be ruled out and increased volatility will be with us for some time whatever the result.
One thing that has changed is that the ECB appears to have found its backbone; the scale of QE and the commitment to “do whatever it takes” shows that. If they come out fighting after the referendum to support stability and liquidity, it will significantly reassure the market.
Some of those most exposed to Greece, such as Romania and Bulgaria through trade or bank ownership, are now more insulated due to changes in export patterns and the firewalls in place. The biggest current exporters to Greece are all larger economies better able to absorb the pain: Germany, France and Russia - although a further blow to Russia’s embattled economy will not be welcome. The biggest investors in the Greek banking sector meanwhile – US, German and UK banks and funds – will be exposed to heavy losses and so will bond holders, largely now of course in the public sector but ultimately backed by tax payers, with Germany, France, Italy and Spain most exposed.
While financial contagion may be a lower risk than it was, one area where risks are perhaps higher is on whether people actually believe that the EU can deliver on what it wants. If "the irrevocable fixing of exchange rates" that was part of the eurozone launch can be dissolved then how will sentiment alter on the potential of the UK to leave the EU, for separatist regions to break away, or for treaty changes in untouchable areas like the free movement of people? The free movement of capital has already become less free that it was after all. The question mark over reversibility is therefore perhaps the biggest downside of recent events.
Real Estate Implications
Outside those impacted by stock market volatility, the impact on property investment will be muted by the weight of capital in the market and underpinnings from QE. However, there may be a shift in demand as some will see this as a reason to refocus on safe-haven markets such as the UK, Germany and the US. Others will be more risk averse still and may steer clear of the eurozone entirely. They however are likely to be in a minority, as the search for quality assets drives investors to broaden their buying horizons not reduce them. What is more, economics favour such an approach, with Spain, Italy and Portugal all enjoying growth upgrades over the past quarter for example. It may at the same time lead to demand for a higher risk premium from secondary property – and that is no bad thing given the potential for high demand and QE to drive an unsustainable bubble in these markets. Long term meanwhile, the dilution of the EU guarantee of irrevocability could lead to more differentiation in risk pricing between countries than we have seen in the past.
For the occupier meanwhile, the direct impact should be limited given the economic scale of Greece. However we have already seen sentiment surveys dip and there may well be a delay in some investment and spending that will impact overall economic growth. This should nonetheless be temporary and while rental growth expectations may soften for this year, the overall trajectory will remain upward. At the same time, once negotiations with Greece get serious, more focus should come on reform progress in all markets – and again more differentiation should be seen market by market as a function of how well they are reforming.
David Hutchings comments: “Overall the impact of the referendum itself may be short-lived but there will be far reaching and fundamental shifts happening: in demand for serious reform, in the trust awarded to the EU, in the spread of risk premiums demanded by investors market by market and, hopefully, in helping to deflate a bubble in secondary assets before it can build up.”