Fund managers fear Greek default but not Grexit

A credit default by Greece appears likely over the next few months, or sooner, but this doesn’t mean we will see a Grexit, fund managers say.

A survey by Bank of America Merril Lynch, which covers more than 200 fund managers, found that 42 per cent of fund managers predict Greece could default without exit, compared to 15 per cent who think a Grexit will occur.

Default, in fact, does not necessarily mean Grexit, argues Pictet Wealth Management economist Jean-Pierre Durante. 

“It is not in anyone’s interests for Greece to leave the eurozone. For Greece, it would mean widespread bankruptcies. For the remaining eurozone members, the fact that a precedent of exit had been established would probably lead to a permanent upwards re-pricing of their sovereign debt. For both sides, it would be a very risky leap into the unknown,” he says.

F&C Investments head of multi asset Paul Niven doesn’t see a Grexit coming, however, concerns over a possible default will continue.

Though remaining optimistic in the long term, he says: “Within fixed income we have taken off some risk by reducing our credit exposure. We have moved from positive to neutral weightings in global high yield, emerging market debt and index-linked bonds. Our change to a more cautious stance is merely a reflection of near-term challenges.”

Greece was given a €240bn (£173bn) bailout package by the EU, European Central Bank and International Monetary Fund in exchange for promises on free market reforms and privatisations. It has still to repay a €1.5bn in loans to the IMF and a further €5.2bn in short-term loans by the end of the month.

OMGI head of fixed income Christine Johnson says there has been a “medium size panic” in the market over the past few weeks, which is contained and manageable, but suddenly “everybody feels to have been woken up by the fact that Greece may not get a deal”.

Greece is expecting the EU and IMF to release €7.2bn of the remaining bailout funds. Eurozone finance ministers will meet again on Thursday, however, Greek finance minister Yanis Varoufakis said he will not present new proposals at the meeting probably delaying negotiations, and further increasing investor worries.

Johnson says: “The cash market just freezes when things [like these] go wrong. Everybody is desperately trying to hedge their positions because at this point is too late to try and sell bonds.

“Everything may look different very quickly. You might get this lumpy effect where people suddenly panic and then squeezing in one instrument trying to hedge.”

However, Durante says a contagion from a Greek possible “short-lived” default to financial markets and to other periphery countries will be “likely limited”.

He says: “European banks have been recapitalised and have markedly reduced their exposure to Greece, and ECB quantitative easing and Outright Monetary Transactions will help to bolster sovereign bonds, and financial markets more widely.”

Additionally, though the Greek economy is “slowly bleeding”, F&C Investments chief economist Steven Bell is not worried as he believes the rest of Europe is “still very strong”.

He says: “Peripheral European economies are much stronger, like Spain and Ireland, which are the strongest growing economies in the Eurozone.”

Rowan Dartington Signature’s Guy Stephens agrees with many on the more positive outlook for Europe though thinks it is clear we might see a period of market uncertainty in the short term.

“[If Greece defaults] that will cause a short period of uncertainty and nervousness, but it is likely to be an isolated situation from which the rest of Europe can move on from.”