In yet another unexpected twist to the Greek drama, Greek voters delivered a resounding “No” vote in Sunday’s referendum, strongly rejecting the previous offer by Greece’s creditors.
While the “No” vote doesn’t necessarily translate into an immediate Greek exit from the euro, it does substantially raise the odds that one will occur. At the very least, this outcome will lead to a prolonged period of chaos, as European officials try to salvage the situation amid continued negotiations. And a prolonged crisis risks putting the brakes on a recovery in European credit growth, slowing the region’s recovery.
However, as I write in my new weekly commentary, “Staying on Course as Greece Enters Uncharted Waters,” I don’t believe the situation in Greece poses a longer-term threat to the global economy or financial markets. Here’s why.
Greece’s direct impact on the global economy and markets is tiny. It represents just 0.26 percent of global gross domestic product (GDP)—less than Peru or Romania. In addition, the country’s equities account for just 0.035 percent of the MSCI All World Equity Index, and most European companies have little to no sales exposure to Greece. In addition, Greece’s debt is mostly held by its official creditors (which can be easily recapitalized)—not the private sector.
The European Central Bank (ECB) is providing a credible backstop to the European banking system and is positioned to contain any possible contagion beyond Greece.
The European banking system is in much better shape today than it was in 2011-2012, when the European debt crisis first went mainstream. Banks have recapitalized, and the private banking sector’s lending exposure to Greece has dwindled to almost negligible levels, as the chart below shows.
To be sure, though market reaction to the vote appeared muted early Monday, global markets are likely to take their cue from Greece in the short term. Indeed, last week was dominated by a widespread aversion to risk, a function primarily of increasing worries over Greece, with most equity markets falling and so-called “safe haven” bonds rallying.
Still, the continued benign monetary environment and low bond yields should mitigate the size of any correction, and the systematic impact will likely be limited. As such, perhaps more important for U.S.-based investors will be the outcome of second quarter earnings. With estimates coming down aggressively, the U.S. economy recovering and dollar strength moderating, U.S. companies should have an easier time beating estimates this quarter.
Sources: BlackRock, Bloomberg
Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock. He is a regular contributor to The BlackRock Blog.
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