Wednesday, 17 June 2015 20:58

Greece - Is the market too complacent?

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Mark Draper recently met with Nik (Portfolio Manager, Platinum Asset Manager) to ask him whether he believed the market is being too complacent about the risks in Greece.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mark : Mark Draper here with Nik Dvornak, portfolio manager of Platinum Asset Management. We’re talking about Greece today. Now Nik, the market is incredibly complacent at the moment, everyone seems very relaxed with the situation in Greece. Do you think the market is right to be relaxed about Greece or how do you see it?

Nik: Well indeed they are very relaxed perhaps surprisingly so given how much turmoil there was two years ago when it seemed like the exact same things was playing out. Look, so a few things have changed. So what has changed? Number one, the exposure of European banks and other financial institutions to Greece is significantly diminished. This partly because government institutions like the stability funds taken on and have taken on some of that debt from the banks and certainly because Greece had worked out some of its debt in the past and those banks have already worn those losses, so their exposure to Greece is minimal. The exposures now lie predominantly with European Central bank (the ECB) and the European governments.

Nik: As for whether people are right or wrong to be worried, well clearly they are not very worried at all at the moment.

Nik: Where you might have some concern is if a group default does damage the financial standing of some of the European sovereigns that they owe money to or alternatively , you can see Greece is essentially the microcosm for many countries in Europe and what we are seeing here could play out in other countries and I think the market is assigning a very low probability to that, if that probability begins to change and increases in the investor’s minds as we go through subsequent elections in Europe, we could see a period of a lot more volatility ahead.

Mark: And we were talking before, off camera, about the effect of quant easing, over in Europe with all of what is playing out in Greece, how does that actually reduce the risk, if you like, of what is going on at the moment?

Nik: Yeah, so one of the risks of course will be that Greece defaults, they owe 320 billion dollars to investors and their current debt. A lot of those other investors are other European governments who have very stretched balance sheets to begin with. So the risk is of those investors reassessing the financial stability of some of those European countries and they are reluctant to enter them again. Now what QE does is create a buyer of last resort in for the European central bank which buys these bonds, and you can see that even with all the turmoil in Greece, the Portugese government can still borrow half of a percent cheaper over 10 years than the US government and they borrow it in Euro which is a currency investors don’t really want to hold so the US government is borrowing in US dollar, investors want to hold that currency and they still demand half a percent more of holding US government then the Portugese government did.

Mark: And the Italian Government can borrow less than the US, and at this moment as well.

Nik: So you know, that just kind of keeps this down with pressure on yields and keeps pressure off the governments and so the idea is that they take out additional loss from Greece, well this buyer of last resorts keeps the fund flowing and the market open, so it stops the knock on effect.

Mark: So quantitative easing is a positive thing for controlling the situation but the risks are that politically it could escalate in other countries with extreme political parties getting into power, that would be one of the things to watch.

Nik: And that is very much the risk in the background and you are seeing it in France and you are seeing it in Spain but also other countries like the UK which is also part of the zone, so there is that border risk and I guess a lot of it depends on how Greece plays out. If the Greeks give Eurozone and as result their debts get written off and the economy recovers and they have a weaker currency and are able to trade their way out, it may encourage other voters to be tempted to follow the same path. If things turn out very horribly for Greece, if it worked the other way, pushed people back to the political centre, away from the extremes, it might actually be good for.

Mark: So it’s being controlled at the moment, in this certain situation, it is definitely worth monitoring from an investment perspective and Nik, thank you very much for your time.

Nik: Thank you very much

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