Why Greece Should Not Worry Equities

Includes: FXE, GREK, SPY
by: Disruptive Investor

The Greek debt crisis is not a threat to risky asset classes, especially US equities.

The global banking system exposure to Greek debt is lower and should not translate into a full-blown credit crisis, even if Greece defaults on debt.

For the US and the euro area, Greece is a geopolitical issue more than anything else at this point of time.

Greece has been causing market scares in the recent past, and there have been concerns of a potential exit of Greece from the eurozone and its impact on asset markets. In a recent development, European Commission President Jean-Claude Juncker commented that the Greek prime minister has failed to come up with an alternative proposal for continued negotiations with the country. Amidst these negotiations, this article discusses the critical reasons to believe that Greece is not a major worry for asset classes, and that near-term nerves related to Greece should not worry investors.

The first factor for believing that Greece is not a major concern for asset markets is geopolitical. Ever since Alexis Tsipras has come to power, Greece has been warming relations with Russia. In my view, if Greece decided to leave the eurozone, Russia or China would be the source of potential bailout for the country.

More than Greece leaving the eurozone, the concern for Europe as well as the United States would be that it can get closer to Russia. In the recent past, Russia has been aggressive in Ukraine, and an alliance with the Greeks could further escalate geopolitical worries for the NATO.

The best way to avoid tensions is to keep Greece within the eurozone at any cost. I believe that the US, besides the eurozone, would play an important part in negotiations with Greece for a mutually agreed bailout that will keep the country in the eurozone. In a recent comment, US Treasury Secretary Jacob Lew urged the eurozone countries to solve the Greek crisis quickly, as it could have a significant impact on the global financial system.

However, I am of the view that an exit by Greece is unlikely to have a huge impact on the global financial system. The urgency is more political than financial. The chart below backs my view, providing the banking system's exposure to euro area sovereign debt.

It is clear that among euro area countries and the US, the exposure to Greek debt is not particularly significant at this point of time. Among the eurozone economies, German banks were reported to have $28 billion in banking exposure to Greece as of December 2014. However, as this article suggests, the systematic risk remains limited.

Therefore, a financial crisis related to Greece's exit from the eurozone is unlikely, but a geopolitical crisis is very likely.

From an investment perspective, this discussion was important to underscore the point that Greece is not a major threat to the global financial system, and I don't expect any major flow of money away from risky asset classes, such as US equities (NYSEARCA:SPY). The US financial system is largely insulated from debt exposure to Greece, and even with countries having such exposure, the risk does not amount to a potential collapse of a banking entity or the financial system (as was the case during the Lehmann Brothers crisis).

I would, however, keep a close watch on the political developments, and I believe that geopolitical tensions will escalate if Greece exits the eurozone and opts for a Russian or Chinese bailout. This factor can send some jitters through the equity markets, but I don't see that coming.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.