Greece Riles Markets, but Grexit Risk Low? -- Barron's Blog

        By Dimitra DeFotis
        Greek debt default looks likely, but the probability of a Grexit is 1 in 20, say a team of economists at PNC Financial Services Group.
        Markets sold off Monday after the Greek government surprised with plans for a Sunday referendum asking if Greece should accept what Prime Minister Alexis Tsipras has called "unbearable" loan terms. Tsipras is encouraging a no vote that could be disastrous for Greece.
        The Dow Jones Industrial Average fell 1.95% today to 350.33, and the Standard & Poor's 500 Index fell 2.09% to 2057.64. In emerging markets, Greece was the big loser, with the Global X FTSE Greece 20 ETF ( GREK) down 20%. Equities in Turkey, Russia, and emerging Europe also sold off. The SPDR S&P Emerging Europe ETF ( GUR) fell 3.8% and the Market Vectors Russia ETF ( RSX) fell more than 3%.
        The iShares MSCI Turkey ETF ( TUR) fell 4%. Greek banks claims on Turkish banks were nearly 4% of Turkey's fourth-quarter 2014 GDP, according to Capital Economics. See our free post, " Grexit: As Banks Deteriorate, Contagion Risk For Europe, Emerging Markets."
        The euro flatlined at 1.12 against the U.S. dollar. The Greek 10-year bond yield spiked by 462 basis points, with the bid yield on the 10-year Greek bond closing at 15.429%, the highest yield since November 30, 2012. In a normal day, investors would have been more fixated on China. The iShares MSCI China ETF ( MCHI) slipped another 2.8% Monday, bringing its year-to-date gain to a mere 9%. The fund is down 8.4% this month.
        But Greece was the word. Here's where things stand: Greece is unlikely to make an International Monetary Fund loan payment Tuesday, the European Central bank has frozen its emergency liquidity loans to Greek commercial banks, the Greek government has instituted capital controls that may last, and Greeks are waiting in line at ATMs and organizing rallies.
        PNC sends a strong message to Greek voters:
        "The coming week should vividly demonstrate the potential costs of a "no to austerity" vote to Greek voters and dissuade them from choosing "Grexit." The Greek banking system is now shut down until further notice, and Greece's government will be unable to negotiate its reopening without a new aid package ...
        Following a "no" vote, Greece would at the very least be subject to prolonged capital controls, and the Greek government would likely be forced to pay salaries in IOUs rather than euros. Without an aid package, Greek bank deposits would stay locked up
        indefinitely. Higher public spending promised by Greece's Far Left government would only be possible if Greece converts to its own currency and begins printing it; if so, existing bank deposits would be compulsorily converted to a rapidly depreciating new Greek drachma, dramatically eroding the value of Greek citizens' financial assets. Faced with this reality, Greek voters will likely act in accordance with the opinion polls that have long shown them to prefer staying in the E.U. and Eurozone to Grexit."
        In just-published commentary, Barron's Tom Donlan sums up the whopper of Greek debt and points out that the Greek economy has shrunk by 25% since 2010 despite its balanced budget today. He concludes "nothing has changed, except that it's clearer that something must change ... Since its war of independence from the Turkish empire, the modern Greek state has defaulted five times, in 1826, 1843, 1860, 1894, and 1932--not counting the recent restructuring of Greek debt."
        "The International Monetary Fund, the European Commission, and the European Central Bank relieved Greece of 107 billion euros ($119.85 billion) in debt. ... The Greek government has debts that include EUR38.7 billion borrowed from private investors, EUR15 billion from Greek banks, EUR31.8 billion from the International Monetary Fund, EUR19.8 billion from the European Central Bank, EUR7.2 billion from national central banks in the euro zone, and EUR194.7 billion from euro-zone governments (including EUR57 billion from Germany, EUR43 billion from France, EUR37.7 billion from Italy, and EUR25.1 billion from Spain). Some of the borrowing has been turned around to repay older debt, for net obligations of nearly EUR250 billion."
        See the Barron's commentary, " Grease the Skids for Greece," (subscription required) and our posts today on Greece including " 3 Observers On Grexit, Euro Instability & Risk Contagion."
        (END) Dow Jones Newswires

        June 29, 2015 17:47 ET (21:47 GMT)

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