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It’s Crunch Time for Greece

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Greece Debt Crisis

It’s Crunch Time for Greece

June 30 2015, 06.55am GMT


Today is D-day for Greece as the world watches to see the outcome of the country’s ongoing debt crisis. Over the weekend, matters seemed to take a turn for the worse and as a result, the banking sector in Greece was closed.

The fact is Greece is really close to default as well as a potential exit from the euro zone.

In response, the markets in Europe and Asia took a beating while the U.S. stock markets have managed to hold ground and to only post smaller losses.

So as an investor, you might be wondering what can be expected?

Let us took a look back to get an understanding of what has transpired over the last few days. On Friday, Alexis Tsipras, the Greek Prime Minister, surprised European policy makers by announcing that Greece will hold a referendum on the 5th of July. This referendum is being held so that the people can decide whether to accept terms demanded by the country’s international creditors or not.

On Sunday, Greece then announced that the banks in the country would be closed on Monday and would remain closed until the results of the referendum were available.

The fact is Greece is required to pay $1.71 billion, or 1.54 billion euros, to the IMF (International Monetary Fund) on Tuesday, the 30th of June. Should the country miss this payment, this would technically constitute a default since the IMF is recognized as an ‘official’ creditor.

Meanwhile, last week, Christine Lagarde, the IMF’s Managing Director, stated that she would notify the fund’s executive board of nonpayment immediately. This triggered cross-default provisions on the bailout loans that euro zone countries provided Greece.

It is important to note that the U.S. is not really exposed to the debt in Greece. That is, most of this debt is in the hands of the ‘official’ sector which includes the euro zone countries, the European Central Bank (ECB) as well as the IMF.

According to Scott Minerd, global chief investment officer at Guggenheim Investments, more than $350 billion of the country’s debt would be in default if the cross-default provisions are triggered, yet only around $40 billion resides in commercial banks. According to Minerd, $14 billion out of this $40 billion is owed to banks in the U.S. Based on this; Minerd stated that this is insufficient to expose the banks to any damage.

Before you go ahead and pop open that champagne, Minerd also stated that there is currently uncertainty whether any single institution, such as a hedge fund or a bank in the U.S. which is overly exposed to Greece.

As Carl Weinberg, global chief economist at High Frequency Economics, explained that in 1998, the hedge fund Long Term Capital Management collapsed and while it was not a bank, its failure negatively impacted the banking system in the U.S. As Weinberg said, the failure “nearly took out the whole U.S. banking system”.

With all the chaos going on, investors are now questioning whether the U.S. Federal Reserve will delay interest rate hikes. According to Steven Barrow, a currency and fixed-income strategist at Standard Bank in London, a financial crisis or a global asset-price meltdown could definitely cause the Fed to delay.

So if you are wondering if now is the time to buy or bail, Sam Stovall, U.S. equity strategist at S&P Capital IQ, has explained that it is best to first wait to assess how deeply the U.S. market will be affected as the Greek crisis deepens even further.

In a note to his clients, Stovall stated that even if the current Greek events cause the S&P 500 index (SPX, -2.09%) to decline by more than 10 percent, investors could view this as a blessing in disguise. According to Stovall, history has shown that before market shocks occur, this often provides better opportunities to buy than to bail. This is since in most cases, the events often do not dramatically alter the course of global economic growth which is an ideal platform for profitable trading.

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