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Greek Crisis

Greek Crisis

Posted on: July 09, 2015
Author: Gene Hochachka, Chief Investment Officer, ATB Investment Management Inc.

July 6, 2015 Update – In a July 5 referendum, the Greek public strongly rejected the most recent financial bailout proposal offered to their government.  The results of the referendum, which was also largely thought to represent the broader question of whether Greece should continue to use the Euro as its currency, means the Greek bank closure that began Monday June 29 will remain in place.  The restriction of bank withdrawals to only 60 Euros per day, along with other capital controls and restrictions on money transfers, was enacted by the Greek government on June 28 after the European Central Bank (ECB) refused to increase its emergency funding of Greek banks, which had been hit by a wave of withdrawals.  The ECB’s refusal in turn occurred after the Greek government essentially walked away from the negotiating table two days earlier and announced the referendum.

Some additional salient points are first that Greece has already defaulted on the government debt that was restructured in 2012. Secondly, as a condition of its prior bailouts, Greece’s government was required to implement significant austerity measures and it did so successfully, thereby running a primary budget surplus (i.e. excluding interest charges).  Third, the Greek economy was badly damaged in the interim by those austerity measures.  For example, Greece’s unemployment rate started 2010 at 11% but increased to 25% by mid-2012 and stayed there or higher ever since.  Finally, no country has yet left the Eurozone and so no rules yet exist as to how a departure should occur.

While this may represent a time of reckoning for Greece, it also begs the question of why global stock markets sold off by 2% or more on June 29.  The short explanation is that perceived risk in the world financial system rose, parallel with the realization that the Euro is not an inviolable, eternal arrangement.  But that answer is not very satisfactory.

We think a better answer is that, as often happens in financial markets, exaggeration temporarily rules the day and global financial markets used the most recent of Greek/European wrangling as a convenient excuse to exhibit some worry.  A great example of this exaggeration is German Chancellor Angela Merkel’s comment that “if the Euro fails, then Europe fails.”  The idea that a Greek exit from the common currency – membership Greece attained by falsifying its government financial records, membership which served both itself and the other members poorly - will automatically spell the end of the trade, financial and other ties between European countries, and maybe even allow the continent to revert to its warring ways, is simply ludicrous.

Similarly, the direct impact on the North American economy of a potential Greek exit from the Euro is virtually nil because Canadian and American trade and capital flows with Greece (a nation of only 11 million people) are tiny.  However, that didn’t prevent US or Canadian stock markets from falling sharply on June 29. If the rational reasons don’t suffice to explain stock market movement, then only the irrational and emotional reasons remain.  As we’ve seen so many times in the past, the irrational will eventually fade as unwarranted emotions wash out and fundamentals come to the fore.  In this instance, the fundamentals are very straightforward:  the choice of a small country to use its own currency instead of the Euro has almost no direct impact on the world economy or the world financial system.


The information presented has been prepared by ATB Investment Management Inc. (“ATBIM”). ATBIM and ATB Securities Inc. (“ATBSI”) are wholly owned subsidiaries of ATB Financial and operate under the trade name ATB Investor Services. ATBSI is a member of the Canadian Investor Protection Fund and Investment Industry Regulatory Organization of Canada.

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The information provided herein is a simplified general summary for information purposes only and is not intended to replace or serve as a substitute for professional advice. Professional tax advice should always be obtained when dealing with taxation issues as each individual’s situation is different. This information has been obtained from sources believed to be reliable but no representation or warranty, expressed or implied, is made ad to their accuracy or completeness.

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