Fisher Investments View: The Greek Jitterbug

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Markets were jittery again Wednesday, likely thanks in part to former Greek Prime Minister Lucas Papademos’s interview with Dow Jones. Papademos, who just left office last week, said he thinks European states are preparing contingency plans as a Greek exit would have “catastrophic” economic consequences for Greece and significant implications for the rest of the eurozone—though he has no specific knowledge whether the plan-making rumors are true. Regardless, he feels a Greek exit is unlikely to materialize. Papademos also indicated current government funding will run out by June 20 and failing to uphold the bailout terms (as advocated by Alexis Tsipras and the Syriza party) is misguided.

Meanwhile, other news outlets reported the EuroGroup (a panel of eurozone finance ministers) has asked governments to prepare contingency plans for a Greek exit and the ECB has established a working group to address Greece.

As we at Fisher Investments have said before, it’s near impossible to isolate a single driver of any single day’s market action. There’s just too much going on at any given time to say definitively one thing caused the majority of a day’s market movement. That said, it has seemed the case recently markets have been particularly sensitive to any Grexit-related news. And Italian and Spanish yields ticked incrementally higher after Papademos’s interview, possibly tied to concerns a Greek exit may create some panic about their own fiscal situations—justified or not.

Maybe to an extent Papademos is right—maybe not. To be sure, it’s not outside the realm of possibility Greece does exit the euro sooner rather than later. And if it does, that could certainly create some interim concern Italy and Spain are the next dominoes to fall.

But the reality has been and continues to be twofold: First, it’s been our position at Fisher Investments that a Greek exit seems less likely than Greek politicians ultimately (likely at the eleventh hour) coming to the table and finding a way to remain in the eurozone; and second, even if Greece does exit, European officials and politicians have repeatedly demonstrated their willingness to take extraordinary measures to backstop the overall financial system. If Greece exited and if that touched off something of a panic elsewhere, it seems likely the ECB would step in with some action—maybe another LTRO or something along those lines—to help stabilize sentiment short term. That doesn’t mean there couldn’t be some market roiling action if that happened. But it seems clear everyone involved sees the stark difference between Greece and the rest of the periphery.