Greece’s default on a payment to the International Monetary Fund this week has been met by a shrug among US-based bond fund managers.
“It was kind of a yawn,” Andrew Hofer, managing director at Brown Brothers Harriman in New York told AsianInvestor.
A few years ago this would not have been the case, given extensive commercial lending exposures to the Greek government. Jitters over Greece’s potential exit from the euro in 2012 saw bonds in other peripheral nations plummet, with for example Portuguese 10-year bond spreads spiking to a high of 1,560 basis points over US Treasuries. This week Portuguese 10-year bond spreads are trading about 244 bps over.
Stocks in Europe have also been resilient. “Europe and the ECB have effectively ringfenced Greece,” said Michael Materasso, co-chair of the fixed income policy committee at Franklin Templeton in New York.
Fund managers note that Greece’s economy is only 2% of European GDP; that it has no exports that are vital to industries elsewhere; and that its current account is roughly neutral, meaning it does not have a balance-of-payment problem.
Greece missed a €1.5 billion payment to the IMF on Monday, and imposed capital controls to safeguard its banking system.
But, said Materasso, “This isn’t a game changer for Europe or for the bond markets.”
Although bond markets have long expected a showdown between Greece and its creditors, the surprise this week was Greek prime minister Alexis Tsipras’s decision to sponsor a referendum on whether the government should accept bailout conditions in return for financial aid.
Bond managers hope the population votes Yes, despite Tsipras’s call for a No result.
“A Yes vote is more likely if things in Greece get bad,” said Michael Swell, managing director at Goldman Sachs Asset Management in New York. “A Yes vote reduces the chance of market contagion.”
He added, however, that markets have not reacted strongly to the surprise referendum.
From the perspective of dollar-based investors, the Greece debacle is unfortunate but also appears to be contained. “It is not going to derail US economic growth or the Fed’s liftoff,” Swell said, referring to the Federal Reserve’s intention to raise interest rates this year.
Longer term, Greece’s default and its possible exit from the eurozone will call into question Europe’s monetary union. But even that more fundamental issue will probably not arise for a few years, because Europe is entering an economic recovery and the ECB’s quantitative easing will boost asset values.