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PA ANALYSIS: No room for complacency as markets prepare for Greek worst

“Events in Greece have tipped the balance,” Bank of England Governor, Mark Carney, said on Wednesday as explanation for the Financial Policy Committee’s view that risks to financial stability have worsened.


In the latest edition of its bi-annual Financial Stability Report, released on Wednesday, the committee said that for much of the period since December, the outlook for financial stability was broadly unchanged, “but, as risks associated with Greece began to crystallise in recent days, the outlook had worsened.”

However, Carney was quick to explain in the question and answer period following the prepared statement that, while the risks to Greece had become “acute” the possibility of an intensification of the crisis had been well known for a long time and, that the intervening years had been well spent in preparation and that, importantly, things are different from 2012.

Not only have new tools have been developed in the euro area – most importantly, tools for the European Central Bank – he said, but these banks have “demonstrated their willingness to use those tools”.

Indeed, the view that the contagion risk from Greece remains limited is fairly widespread within financial markets not only because of the tools mentioned above, but also because there is more clarity around where the debt is.

Stephen Macklow-Smith, manager of the JPMorgan European Investment Trust explains that much of the issue during the first crisis is that no one really had a clear view of where the debt was and, importantly the health of the various counterparties.

Now, he says: “Ownership of Greek bonds is concentrated in the hands of official institutions, and this can be seen in the huge fall in the outstanding volume of Greek credit default swaps, from around €65bn in 2009 to around €1.5bn now.”

He adds too that eurozone banks are not lending to Greek banks in the interbank market, and Greek bonds are ineligible as collateral, “so the risk of a failure of confidence in the financial system is low.”

As a result of this, Macklow-Smith remains positive on the outlook for the rest of Europe. As does Andrew Pease, global head of investment strategy at Russell Investments, who said yesterday that while there are no good outcomes for Greece, it is not the most important factor likely to impact markets. According to Pease, Russell Investments is still expecting strong earnings growth from the region as a whole and remains overweight there.

That said, Pease did add that the group has now moved from the moderately pro-risk stance it has adopted for much of the year to a more neutral one, and currently has between 10 and 20% of its holdings in cash ready to deploy.