Worries over an exit by Greece from the euro zone keep the fear meter twitching for many investors, as highlighted by recent stock market jitters over the situation in Europe. But the worst case scenario -- of some kind of financial Armageddon emanating from Greece -- may be overdone.
There is a contrary view: that a Greek from the euro zone won't be disorderly because it's been so well anticipated and may even have a silver lining in the form of a looser European monetary policy.
Eoin Fahy, chief investment officer of Kleinwort Benson Investors in Dublin, presented the contrarian view at a Bank of Montreal teleconference on the euro zone crisis earlier on Thursday. His assessment is that there is a “75 per cent plus” likelihood that if Greece does leave, the departure will be orderly and accompanied by countermeasures to prevent contagion from infecting the rest of Europe.
He believes an exit will be greeted by an “almost simultaneous” series of policy announcements indicating that the European Central Bank will flood the banking system with liquidity to prevent a financial crisis. These measures would include massive lending to banks at low interest rates for long periods.
It would be unlikely that authorities “are unready to the extent that they won't see this problem coming. You have to believe that they're already planning for this.”
At the heart of the worst case scenario for markets is the worry that Greek bank depositors will lose much of their money if the country exits the euro and goes back to a national currency. This in turn could cause bank runs in other weaker countries as depositors yank out funds and move their money to perceived safe havens, such as Germany and Switzerland. Such money flows would quickly lead to another Lehman-style financial panic as banks collapsed.
But these fears are overdone. “The European Central Bank couldn't stand by and allow that to happen,” Mr. Fahy says. “My sense is that if Greece does exit that it stands to reason that it will be accompanied by a series of emergency measures designed to isolate Greece from the rest of the euro zone and to provide massive liquidity to the rest of the euro zone.”
Looking at the investment implications for Canadian stocks, Paul Taylor, chief investment officer at BMO Harris Private Banking, said there could be some modest downside pressure from the events in Europe, but he doesn't foresee panic selling.
“I don't think we're dealing with a situation that is as severe, for a variety of reasons, as the Lehman situation, so I don't think the S&P/TSX is heading anywhere close to retesting the lows of 2008,” he said.
During the financial panic in 2008-09, the Toronto index fell to around the 7,500 level, compared to around 11,500 now. Mr. Taylor said there might be a 8 per cent to 10 per cent slide, but he's counting on the Greece problems being contained and any exit from the euro being orderly.