Fear has set into all risk markets in the past week as the possibility of Greece not fulfilling its obligations (note the difference from defaulting which according the Credit Rating Agencies is reserved for private creditors) became a reality. All markets have suffered but as you would expect in a flight to quality scenario the further down the capital structure you are the greater capital volatility  you experience. Surprisingly the domestic equity markets have held up reasonably well post the announcement (at the time of writing we are only down ~1%) but this risk has been building over preceding weeks and is reflected in the ASX200 price. It is also a signal that investors are confident in an eventual resolution. Domestic credit markets seem to have suffered more from the announcement and this was evident in the major bank market. This following is the generic 5Y Senior Unsecured trading margins: 1 June 2015: 0.77% 29 June 2015 (Pre Annoucement): 0.86% (+0.09% or +11% from 1 June) 30 June 2015 (Post Announcement): 0.95%  (+0.18% or +23% from 1 June) This is a significant move and will in turn reprice the entire bank capital structure (we note that the unloved PERLS VII transaction reached a trading margin high of 4.47% over BBSW on 30 June). It is clearly difficult to assess the situation in Greece and hence we are not premeditating any recommendation changes. What is important is to understand the facts and what is due to happen: Facts:

  • Late Friday night discussions between Greece, ECB, IMF and European Union broke down as Greek negotiators were unhappy with the terms of the emergency funding;
  • Post the Friday night meeting the Greek Prime Minister went on television and stated the terms of the new creditor proposal were “unbearable new burdens on the Greek people”. Hence, the Greek Prime Minister has called a referendum this Sunday;
  • On Tuesday the IMF confirmed Greece had missed a EUR 1.5 billion repayment and was now in arrears  – hence it can only receive IMF financing once the arrears are cleared. It now joins the ranks of Zimbabwe and Cuba;
  • On Tuesday Greece requested an extension from the IMF of Greece’s repayment obligation which will go to the IMF’s Executive Board in due course;
  • In a final request from Greece a request was sent to the European rescue fund which was knocked back saying it would be dealt with “through normal procedures”
  • Having missed the payment and having no access to IMF funding the Greek Prime Minister closed the banks for a week and introduced a series of  capital controls (including restricting the amount of deposits which can be withdrawn). This ensures the viability of the banking system and a run on bank deposits.

What is due to happen:

  • July 1: Governing Council of the ECB non-monetary policy meeting in Frankfurt; to discuss liquidity situation of Greek banks — About 1,000 designated Greek bank branches open for pensioners without credit or debit cards; limit for withdrawals set at EU120 this week
  • July 5: Greek voters scheduled to decide in referendum on creditors’ proposals for unblocking aid, in a vote which could decide the country’s future in the euro area
  • July 8: Greece to sell 26-week bills
  • July 10: Greece needs to refinance EU2b in t-bills
  • July 13: IMF loans repayment totaling ~EU450m due — Eurogroup meeting
  • July 14: Greece needs to repay JPY11.67b (~$94m) in yen loans
  • July 16: Governing Council monetary policy meeting of the ECB in Frankfurt
  • July 17: Greece needs to pay ~EU71m in interest on the 3-yr bond it sold in 2014 — Greece needs to refinance EU1b in t-bills
  • July 20: Greece needs to repay ~EU3.5b in bond redemptions; bonds held by the ECB
  • July 31: Moody’s due to review Greece’s sovereign debt
  • August: Greece needs to service ~EU600m in interest payments, including a ~EU80m payment to the European Financial Stability Facility
  • August 1: Interest on IMF loans totaling ~EU175m; payment due by August 5
  • August 5: Governing Council of the ECB non-monetary policy meeting in Frankfurt — Greece to sell 26-week bills
  • August 7: Greece needs to refinance EU1b in t-bills
  • August 14: Greece needs to refinance EU1.4b in t-bills
  • August 20: Greece needs to repay ~EU3.2b in bond redemptions; bonds held by the ECB

Without emergency funding a large funding gap appears for Greece and it will not come from the IMF. Although the Greek situation does not directly impact Australian credit markets. We are indirectly at risk through exposure to foreign capital markets and any impact on valuations in Europe will have a mark to market effect on the domestic market. This market contagion risk is substantial but we expect Europe to stumble through this one way or another primarily because they are more prepared psychologically and financially.