The close: TSX dives 317 points as Greece fears grip global markets

Share

The possibility of Greece leaving the euro currency union gripped global markets on Monday, reigniting fears of a destabilizing financial shock emanating from the country's enduring financial and economic crisis.

After Greek bailout talks collapsed, stock market benchmarks worldwide dropped in Monday's trading.

But while stock losses were nearly universal, the magnitude of the investor reaction was modest compared to past flare ups in the crisis.

"I would argue the market is showing remarkable resilience," said Eric Lascelles, chief economist for RBC Global Asset Management. "The euro is largely holding steady, stocks are down only moderately and Italian yields are still in the vicinity of U.S. yields."

That's a different story from a few years ago, when the eurozone's debt saga would provoke much wider swings in equities, currencies and bonds. While a Greek exit could be unpredictable and messy, the world has had years to insulate itself from financial contagion, Mr. Lascelles said.

Greece brought its future in the eurozone into question on Friday when it walked away from negotiations over an extension to its bailout program, which has pumped hundreds of billions of euros into the troubled country over the last four years, and which expires at the end of June.

With a €1.5-billion ($2.1-billion Canadian) debt payment due to the International Monetary Fund on Tuesday, Greece's government instead said it will hold a national referendum on July 5. The vote is seen as a proxy for Greece's continued membership in the currency union.

In response, the European Central Bank capped the emergency liquidity supplied to Greek banks, forcing the Greek government to impose capital controls to prevent a financial collapse. The Athens stock exchange and Greek banks are closed pending the referendum, and bank withdrawals are limited to €60 per day per account.

Investors reacted by trading down risk assets in favour of safe haven securities. Investor fear was most apparent at the epicentre of the crisis. While Greek stocks are frozen, a U.S.-based exchange traded fund called Global X FTSE Greece 20 fell by 20 per cent on Monday.

Beyond Greece's borders, the shock waves spread through foreign stock markets with diminishing intensity.

Every single stock in the blue-chip Euro STOXX 50 index was down on the day, with the benchmark declining by 4.2 per cent. The greater European powers showed a little more resilience, with the French CAC 40 index dropping by 3.7 per cent, and the German DAX by 3.6 per cent.

Canadian stocks swung to a loss on the year, as the S&P/TSX composite index fell by 2.2 per cent, or 317.9 points. And the S&P 500 index of the largest U.S. stocks dipped by 2.1 per cent, or 43.85 points.

For Greece itself, which is laden with debt and mired in economic depression, the stakes couldn't be higher. But in the intervening years since Greece last inspired panic in financial markets, eurozone officials have put in place measures to limit the spread of financial contagion.

The bulk of Greek public debt has been taken out of the private sector, limiting the exposure of the European banking system to a default event. The European Stability Facility, a permanent bailout fund, was established. And the European Central Bank implemented its own quantitative easing program, buying up €60-billion worth of debt every month.

"A large majority of Greek public debt is owned by official European creditors," TD economist Andrew Labelle, said in a note. "[And] the ECB has the ammo to quell rising volatility."

Economically, Greece claims a two-per-cent share of European Union GDP, which is insufficient to have any real consequences for global output and trade.

Meanwhile, U.S. investors' holdings of Greek stocks amount to only about $5.7-billion (U.S.), according to Bloomberg, which wouldn't even qualify as a single large-cap stock by U.S. market standards.

So the resurgence of Greek default fears has "prompted a flight-to-safety market response, but no panic," noted Doug Porter, chief economist for the Bank of Montreal. "We believe this is entirely the appropriate response."

A major pullback in North American equities resulting from a Greece exit is not out of the question, but there is likely to be a strong bid among bargain hunters seeking to profit from a selloff, Mr. Lascelles said.

For those investors, Monday's modest dip in Canadian and U.S. stocks doesn't go far enough.

"We expect stocks to decline further this week as uncertainty reigns and that bond yields should fall this week in North America as investors seek a safe harbour," Norman Levine, managing director and portfolio manager with Portfolio Management Corp., said in a note. "We look forward to further declines in equity prices and this is hopefully the market correction we have been expecting and eagerly awaiting."