Global stock markets proved resilient on Monday despite Greece’s shock rejection of the terms of an international bailout.
While US, European and Asian stock markets all fell, the market reaction was much more muted than analysts had expected.
In the US, the main indexes all opened about 0.7% lower, while London’s FTSE 100 slipped 0.7% and Japan’s Nikkei index fell more than 2%.
The euro also lost ground.
Meanwhile, France’s Cac 40 dropped 2.2% and Germany’s Dax lost 1.7%.
“Markets have yet to be convinced in full either that the [Greek] exit door will be open or that the extent of any contagion from this could be irreparably damaging to the system,” said Neil Williams, chief economist at Hermes Investment Management.
Impact on banks
In early bond trading, the reaction was similarly soft. The interest rate on German bonds fell slightly as investors rushed into perceived safe haven assets, while yields on Italian, Spanish and Portuguese government debt ticked higher.
Greek bonds have not been traded on regulated platforms since last Monday, but indicative prices suggested the yield on two-year bonds would be 49.77%, with the yields on 10-year bonds at 17.4%.
On the stock markets, bank shares were some of the biggest fallers, with Barclaysdown 1.7% and Italy’s Unicredit falling 3.9%. Trading in Monte dei Paschi shares was suspended after they fell 5.7%.
Analysts said the falls were linked to fears that the crisis could increase losses from bad loans and potentially drive up borrowing costs for governments.
But most banks have already made sure their exposure to Greek assets is limited.
Overall, European banks have reduced their exposure to Greece by over 80% since the 2011-12 crisis, according to Huw van Steenis, a banking analyst at Morgan Stanley.
His research shows that the threat of serious contagion in the banking has reduced since the initial Greek crisis.
Greek Prime Minister Alexis Tspiras has said that Greece will go back to the negotiating table on Monday, adding that an International Monetary Fund (IMF) assessment published last week confirmed that a restructuring of Greek debt is necessary.
Without more emergency funding from the ECB, there are fears that Greece’s banks could run out of cash within days, potentially forcing the government to issue another currency to pay pensions and wages.
But some European officials have already warned that creditors could take a “No” vote to mean that Greeks had rejected further talks.
Germany’s Deputy Chancellor, Sigmar Gabriel, told local media that renewed negotiations with Greece were “difficult to imagine” and that Greek Prime Minister Alexis Tsipras had “torn down the bridges” between Greece and Europe.
Kathleen Brooks, UK and EMEA research director at currency firm FOREX.com, warned that she expected the euro to fall further.
“I don’t think that the market really thought there would be a ‘No’ vote. However, now that Tsipras’s bluff has been pulled, essentially Athens has the upper hand over the European authorities. We believe that this makes the euro extremely vulnerable to speculative attack in the coming days.”
And most analysts said that for the moment they expected markets to remain volatile.
“The risk of a Grexit has certainly increased. This will make for a traditional ‘risk-off’ in line with what we saw last Monday, with more risky assets going down and money floating to safe havens,” said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets.
“At the end of the day, the negotiations will continue but the outcome is uncertainty.”
Robert Peston, BBC economics editor, Athens:
The damoclean sword hanging over Greece is that the banks will run out of cash in just a few days.
Which means that a decision on what kind of limited service the banks can provide, to be made by the Greek government, will hinge entirely on whether the European Central Bank’s (ECB) governing council decides to freeze, cut or increase the provision of Emergency Liquidity Assistance, or emergency loans to Greece.
As for the ECB, it does not wish to be seen as Greece’s Judge Dredd. It will take its lead from any statement by eurozone government heads on whether there is a realistic chance of a new deal to rescue the finances of the ailing Greek state.
So the fate of Greece lies firmly where it always did, in the lap of the German Chancellor, Angela Merkel and her fellow heads of government.