Photograph by Chris Ratcliffe — Bloomberg via Getty Images
By Geoffrey Smith
July 6, 2015

Europe’s stock markets have opened with a heavy thud Monday in reaction to Greece’s shock ‘No’ vote, but those waiting for outright panic will have to wait a bit longer until the rest of the Eurozone has decided what to do next.

The Eurozone talked the talk of ‘Grexit’ risks all last week, but walking the walk has habitually proved harder in the various stages of Europe’s five-year debt crisis, and so it is today. After a week of brutally confrontational rhetoric and a thunderous rejection of the creditors’ terms at Sunday’s referendum, there have been conciliatory noises from Paris, Rome and, not least, Athens, which is desperate to re-stock its banks with more emergency funding from the European Central Bank.

As a result, markets are holding back from freaking out totally. The euro itself has recouped almost all of the 2 cents it lost against the dollar in Asian trading after the referendum result was published. By mid-morning in Frankfurt, it was at $1.1084, less than half a cent below its pre-referendum level.

As alway, the crucial action, or lack of it, is not in the currency markets, but in the bond markets. Yields on the government bonds of the weaker Eurozone members such as Italy, Spain and Portugal, which are the key indicators of ‘contagion’ to the rest of the region have risen marginally, but are barely above last week’s levels. Likewise, the yield on the ‘safe haven’ German 1o-year bond is down a respectable 6 basis points at 0.74%, but that too is a movement that is well short of panicky.

“This doesn’t feel anywhere near as scary as when Italian and Spanish yields were trading well north of 7% a few years back,” said Deutsche Bank strategist Jim Reid. Italy’s benchmark now yields 2.31%, while Spain’s yields 2.30%.

However, Reid warned that the longer-term consequences could be very different, calling the referendum “a major historic event” and saying that a Greek exit, if it happens, could have significant medium- and long-term ramifications for the survival of the euro.”

Stocks, which are always more volatile, are down across the board, with the smallest losses in Germany and the largest in Italy and, to a lesser extent, Spain.

But even here, movements are expected to stay within limits until the Eurozone’s response to the Greeks’ ‘No’ becomes clear over the course of the next two days. The shuttle diplomacy has kicked off Monday with Germany’s Angela Merkel visiting France’s Francois Hollande. Tuesday evening, the Eurozone’s finance ministers will meet to decide their next steps, and that decision will likely trigger one from the European Central Bank on whether or not to cut off the emergency lifeline for Greece’s banks, the largest of which are widely expected to run out of cash euro reserves today or tomorrow.

 

 

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