If Greek voters vote no, Greece will default and drop the Euro as its currency, switching to a “New Drachma.” Frontier Strategy Group sees a greater than 50% chance that Greece will leave the Euro.
Article by Matt Lasov, Director of Global Research - Frontier Strategy Group
Markets reacted strongly Tuesday morning to Prime Minister George A. Papandreou’s announcement that Greece would hold a referendum on the EU plan for aid. The surprise announcement put the future of the Euro firmly in the hands of Greek voters who are likely to say no to aid for additional austerity. Share prices for European banks, who hold large amounts of Greek debt, plunged 8% and broad European markets were down 4% in early trading.
The Greek government used the referendum as a policy maneuver to buy time to negotiate more favorable terms with EU creditors. The play may backfire as Greek voters are tired of austerity, unemployment and ineffective government. If Greek voters vote no, Greece will default and likely drop the Euro as its currency, switching to a “New Drachma.”Frontier Strategy Group sees a greater than 50% chance that Greece will leave the Euro.
The referendum will most likely take place in January. As a result, companies have two months to put contingency plans in place for Greece. Companies choosing to remain in Greece will need to develop strategies to finance suppliers and distributors as credit from Greek banks will dry up. Opportunistic companies are considering using Greece as an export hub, as leaving the EU would likely devalue the local currency by 50%, making Greece an attractive long-term play.
Impact on emerging markets
Greece leaving the Euro increases the likelihood of a double dip recession across Europe. European banks will take major losses in the their bond portfolios. Markets will also view a Greek exit from the Euro as a precedent for similar action in Portugal, Spain and potentially Italy. Exposure to derivates on bad debt is still unknown, compounding the uncertainty that will cause lending to dry up in both Western and Eastern Europe. Last time Europe went into recession, CEE markets, Russia and Turkey suffered disproportionately. This time, many emerging markets are more linked than before.
While many emerging markets will be impacted by the crisis, leading companies have already identified winners and are prioritizing resource allocations for those markets. India, Indonesia and Africa are set to be the biggest winners as domestic demand is driving robust growth in those markets. The Middle East and Brazil will also carry on through the crisis although they have higher linkages to developed markets because of commodities exports. China, on the surface, is positioned to outperform, but bad domestic debt and a slowing manufacturing sector are causes for concern.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.