CURRENT
POLL

Will bitcoin crash in 2018?

33.33%
Y
66.67%
N
http://blog.en.erste-am.com/wp-content/uploads/sites/13/2015/06/iStock_griechenland_Large-890x390-1435567873.jpg

Greece – the never ending story

© iStock

The breakdown of the negotiations between Greece and its creditors as well as the planned referendum on 5 July troubles capital markets. Greece itself is formally not insolvent. As long that this is not the case the European Central Bank (ECB) will do whatever it takes to contain spillover risks. After the referendum, the next key date will be 20 July, where bonds issued by the ECB will be payable. Until then a number of decisions has to be taken and a new financial package negotiated.

Breakdown of negotiations

The negotiations between the creditors and Greece broke down over the weekend. The reason for is that the prime minister of Greece announced plans to hold a referendum on 5 July.

Banks will be temporarily shut down

In response, the Eurogroup announced that the EFSF financial arrangement will expire by the end of June. Following this decisions, the Governing Council of the European Central bank decided to maintain, i.e., not increase, the ceiling to the provision of emergency liquidity assistance (ELA) to Greek banks at the level decided last Friday. In order to avoid a bank run, the Greek’s financial stability council decided to impose capital controls. Banks will be shut down until at least 6 July and cash withdrawals will be limited to EUR 60 a day. The cashing of cheques will be halted and fixed term deposits will be locked down, according to Bloomberg.

There’s a lot at stake

It is still rational for both sides to reach an agreement. At stake are massive wealth losses and chaos in Greece and spillover effects and increasing disintegration in the Eurozone. Last week, it seemed that an agreement could finally be reached. Unfortunately, on Saturday the negotiations broke down. Nevertheless, a compromise between austerity and haircut on the one side and reforms on the other side is possible. Maybe it will be reached with another government in Greece.

The current government in Greece did not accept the conditions of the adjustment program from the beginning. It argued in favour of higher pension payments and wages, an end of austerity and a debt haircut.

The content of the referendum on 5 July is not clear

The question and implications of the referendum are not clear. Besides the current adjustment program will expire on Tuesday. Most probably, the question will be whether Greece should accept painful austerity or not. De facto, the Greek people will vote whether they want to stay in the Eurozone. Closed banks, limited cash withdrawals and a collapse of the Greek economy argue for a positive outcome of the referendum.

A “Yes” vote would probably cause the Greek government to retreat. In that case, snap elections would be called. In the best case, a technocratic government would be installed. This would most likely lead to an agreement between Greece and the European institutions. As long as the hope for such a positive outcome exists, the creditors will stand ready to help Greece.
A “No” vote or a new radical government in Greece would probably lead to a Grexit in the end.

Uncertainty burdens capital markets

In the meantime, increased uncertainty could cause temporary price losses of risky assets (equities, corporate and government bonds with credit risk). In addition, the Euro remains under pressure.

However, the European Central Bank will do whatever it takes to avoid spillover risks. Especially, it will try to contain a negative spiral of a loss of confidence and asset price losses. The ECB has a range of instruments available: Quantitative easing, rate cuts, conditional provision of unlimited liquidity, targeted liquidity refinancing operations, and so on.

Weakness of the Eurozone becomes visible

The Greek tragedy makes the weakness of the Eurozone visible. It still lacks the necessary institutions for the sustainable functioning of a currency union. There are no common economic, fiscal and financial policy institutions. Obviously, the currency union is not irrevocable. The legal implications of an exit of a country are completely unclear.

 

Did you like this article?

0.00 Average Rating (0% Result) - 0 Votes
Legal disclaimer

This document is an advertisement. All data is sourced from ERSTE-SPARINVEST Kapitalanlagegesellschaft m.b.H., Erste Asset Management GmbH and ERSTE Immobilien Kapitalanlagegesellschaft m.b.H. unless indicated otherwise. Our languages of communication are German and English.

The prospectus for UCITS (including any amendments) is published in Amtsblatt zur Wiener Zeitung in accordance with the provisions of the InvFG 2011 in the currently amended version. The simplified prospectus is prepared by ERSTE Immobilien Kapitalanlagegesellschaft m.b.H. and published in Amtsblatt zur Wiener Zeitung in accordance with the provisions of the ImmoInvFG 2003 as amended. Information for Investors pursuant to § 21 AIFMG is prepared for the alternative investment funds (AIF) administered by ERSTE-SPARINVEST Kapitalanlagegesellschaft m.b.H., Erste Asset Management GmbH and for ERSTE Immobilien Kapitalanlagegesellschaft m.b.H. pursuant to the provisions of the AIFMG in connection with the InvFG 2011.

The fund prospectus, Information for Investors pursuant to § 21 AIFMG, the simplified prospectus, and the key investor document/KID can be viewed in their latest versions at the web site www.erste-am.com or www.ersteimmobilien.at or obtained in their latest versions free of charge from the domicile of the management company and the domicile of the custodian bank. The exact date of the most recent publication of the fund prospectus or simplified prospectus, the languages in which the key investor document/KID is available, and any additional locations where the documents can be obtained can be viewed on the web site www.erste-am.com or www.ersteimmobilien.at.

This document serves as additional information for our investors and is based on the knowledge of the staff responsible for preparing it at the time of preparation. Our analyses and conclusions are general in nature and do not take into account the individual needs of our investors in terms of earnings, taxation and risk appetite. Past performance is not a reliable indicator of the future performance of a fund.

Gerhard Winzer

Gerhard Winzer has worked at Erste Asset Management since March 2008. Up until March 2009, he was Senior Fund Manager in Fixed Income Asset Allocation; he has been Head Economist since April 2009.

He holds a degree from a polytechnical college and studied economics and business at Vienna ...

More

Add a comment

Subscribe to Blog by E-Mail