It's no surprise that the Greek government's decision to put the terms of a bailout to its people for approval in a referendum has ratcheted up tension with regards to the country's debt crisis, and moved it that little bit closer to leaving the euro.
Markets hate uncertainty, and there is nothing more uncertain than asking the population for an opinion on something, normally because they don't just cast their ballots on the substantive issue but also on a range of other factors that are irking them at that time. The inability to read in advance the outcome of a popular vote showed itself in market tension before the Scottish independence poll and the most recent UK general election.
In the case of this approaching vote, due on 5th July, our view is still that the Greeks will back the plan. Poll after poll shows a strong majority wanting to stay in the currency union. With Greek banks shut this week and limits on cash withdrawals, the increasing inconvenience should focus the minds on what may happen if the country is cut loose from the euro (the European Central Bank's (ECB) decision not to increase funds for cash-strapped Greek banks shows a certain political nous in giving the Greek populace a taste of things to come if they vote No). That said, people have an uncanny ability of voting against their own self-interest.
So we are left in a situation where, although it is still the less likely of the binary options, there is a reasonable possibility that Greece could default and be ejected from monetary union. In economic terms, this is pretty small since Greece is just a minor part of the European economy; in sentiment terms though this would be much greater – it's telling that the US has been instructing the Europeans how vital it is to keep Greece in the euro. Markets so far seem to have focused on the former aspect, with equities not quite pricing in the damage that could happen with a Grexit, although currency markets have taken this more seriously of late, with the euro slipping against the dollar.
Our strategy now is to keep a close eye on the situation – luckily we are already fairly defensively positioned should equity markets start to react more violently. We are, however, always looking at the various scenarios to evaluate our best course of action, and we are holding the possibility of taking out some protective hedges in the portfolios should the situation look like it is worsening.
This content was generated prior to Turcan Connell Asset Management Limited operating as Tcam.