Impact of Greece on the markets

These are some brief excerpts from a letter from Schwab on the possibility of a Greek exit:

Will the situation in Greece have a major impact on global financial markets?
The current crisis in Greece may not turn out to be a major market event. Global growth is stronger and more balanced than it’s been for the last five years, with all of the world’'s major economies growing. This means the global economy may be more resilient to shocks, such as a possible Greek default.

Also, the risk of financial contagion has been greatly diminished compared to a few years ago. Greece’'s private sector debt was restructured in 2012, with its value reduced by 75%. As a result, 80% of Greece’s government debt is now held by European institutions, with the European Financial Stability Fund (EFSF) holding the majority. That means it is no longer held by highly leveraged banks that could cause a financial crisis or a hedge fund that could cause a market failure.

Is the crisis likely to spread to other parts of Europe?
Not in our view. The risk appears to be contained, since the European Central Bank stands ready to buy the debt of member nations.

Greeks have been moving euro-denominated bank deposits out of Greek banks to those based in other eurozone member nations such as Germany. After five years of writedowns and little new lending, loans to Greeks by non-Greeks have fallen to less than half the amount of deposits, once government holdings are excluded, data from the ECB and Bank for International Settlements shows.

What would be the impact of a so-called “Grexit”?
There is no official mechanism for a country to leave the eurozone monetary union, so anything that happens will be unprecedented. Ultimately, Greece’s entry into the euro was a political decision. If it departs, that also will be a political decision.

Europe has had years to prepare for the possibility of Greece leaving the eurozone and is more advantageously positioned for it now than a few years ago. We believe a possible Greek debt default is a risk primarily to governmental institutions. If loans are cut off, the effects will likely be most devastating within Greece. Risks include capital flight, devaluation, and shrinkage of the economy in the short term.

Is the Greek crisis creating a buying opportunity for European stocks?
In our view, the fallout is likely to be limited, and investors whose portfolios have been underweighted in European investments may see any major weakness in European stocks as a buying opportunity.

The markets, which have had years to prepare for the impact of another Greek debt crisis, so far have not panicked about it. After Greece walked away from the table on Friday, stocks in Europe closed down about 3% Monday… Europe’s stock market has slumped 6% since its recent peak in April, but remains positive this year even in dollar terms. It’s even possible that European stocks could stage a “relief rally” no matter the outcome, reflecting investors’ desire for some clarity and an end to the situation.