Banking Crisis

What Greek Euro Exit Would Mean For Wealth Management – WealthBriefing Poll

Max Skjönsberg London 21 May 2012

What Greek Euro Exit Would Mean For Wealth Management – WealthBriefing Poll

Ahead of the weekend, this publication sought views from wealth managers on the likelihood of a Greek departure - or "Grexit" - from the eurozone and its impact on the wealth industry.

The impact of Greece leaving the eurozone would at the very least have a damaging effect on the wealth management industry, according to a WealthBriefing poll of European wealth managers and private banks.

Fitch Ratings today downgraded Greece credit rating to CCC from B-, citing the “heightened risk that Greece may not be able to sustain its membership of Economic and Monetary Union (EMU)”. Senior wealth managers are of similar mind: not a single firm, out of about a dozen polled, said that the risk is lower than 50 per cent when quizzed by this publication this week, and some said that the risk is as high as 95 per cent.

“Attaching a specific probability is of little importance, suffice it to say that we consider it a matter of when and not if Greece leaves,” Paul Marson, chief investment officer of the private banking unit of Lombard Odier, told this publication.

The possibility of a Greek exit has been in the headlines for a long time but pressure has been built since an indecisive election in the country at the start of May, when the electorate was perceived as protesting against the bailout deal struck with the other euro members. A fresh election will be held on 17 June, and fringe parties opposed to the deal are ahead in the polls.

“Greece’s inability to form a government stems from the unwillingness of the far-left Syriza party to compromise on its anti-austerity platform and join pro-austerity parties,” said Georgios Tsapouris, investment strategist at Coutts. “Unfortunately, polls indicate Syriza is leading ahead of June elections. Unless Syriza accommodates the adjustment in the tone of austerity proposals by the IMF’s Legarde, and this is accepted by the other members of the Troika, the risk of Greek exit remains elevated.”

Main threat: contagion

Most of the CIOs, economists and investment professionals polled by this publication cited contagion as the main threat to wealth management. “This could have a serious effect on banks in the euro area and other banks around the world”, a chief investment officer of a UK wealth manager told WealthBriefing.

“In due course, as existent and subsequent pressures build, we would expect others to follow suit,” Marson of Lombard Odier said. Marson referred to the banking system as already “very fragile”, and that contagion would force the European Central Bank to embark on major recapitalization.   

“A default by Greece could potentially be compared to the bankruptcy of Lehman’s which triggered a chain of events that led to the financial recession,” said Ted Scott of F&C.

By contrast, Pioneer Investments, an Italian asset manager owned by UniCredit, said that a Greek exit is a possibility but not the base case scenario. Pioneer, which is long Italian and Spanish debt, also suggested that bold political action could avert any knock-on effects it would have on financial markets.

Tsapouris of Coutts said that government bond markets have already begun to price in the risks of a Greek exit, as UK gilts, US Treasuries and German bunds are all trading near all-time low.

“For euro-referenced investors, we continue to favour diversification into both dollar and sterling assets, as well as looking for opportunities to boost exposure to emerging- market currencies,” said Tsapouris. “Moreover, within existing euro exposure, we believe modest weightings in carefully selected European stocks is warranted, given the cheap valuations of key multi-national companies,” he said.

“I would imagine the wealth management industry has considered this risk,” said Gary Reynolds, CIO of Courtiers. “For those that do nothing about it, [it would be] very severe. For those that take precautions, it may be just mild. But if you are long Greek bonds on the exit – pray!”

At Schroders, the UK-listed investment and private banking house, a key concern would be the imposition of credit and other capital controls by Greece in the event of a euro exit.

"We would expect the new drachma to depreciate by anywhere from 30-70 per cent. It is also possible that the authorities would peg the exchange rate at a set rate to the euro," Robert Farago, head of asset allocation, Schroders Private Banking, said.

"It is likely that capital controls will be imposed to put an end to the flow of money out of the country. This is against the rules of the European Union and therefore the country may have to leave the Union, either temporarily or permanently," he continued.

"The day that Argentina allowed its currency to devalue at the end of 2001 marked the start of that country’s recovery. This is likely to prove true in Greece too. Exports of goods and services account for a quarter of annual output and would be significantly boosted by the currency depreciation. However, the initial outlook is uncertain as the political situation is extremely unpredictable, with none of the parties that have ruled in the past maintaining any credibility and none of the alternatives offering a convincing alternative," Farago added.

At Crossbridge Capital, the firm puts the risk of Greek euro departure in the next six months as less than 30 per cent but greater than 50 per cent over the next 12 months.




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