European equities rose on the week, mainly by hanging on to gains made at the start of the week. Expectations that Greece and the rest of Europe would come to an agreement over the weekend were dashed late on Saturday. The game of brinkmanship that both sides had been playing came to a halt when the Greek government called for a referendum on the proposed austerity measures. This led to the euro zone finance ministers rejecting a request from the Greek government for a one-month extension of its bailout.
The on line trading exchanges, open on Sunday, indicate that European equity markets could open down 3-4% when trading resumes on Monday. A four pct. fall in the DAX index would take the index back to where it was this time last week. So far the impact on the Eurodollar exchange rate seems fairly muted. Greece has in theory until Tuesday to find 1.5bn euros to meet its latest obligations, it also needs to hope that it can shore up its banking system in that time.
At this stage its hard to evaluate exactly what the final consequences will be if Greece does eventually default on its obligations, and this leads to its exit from the euro. Interestingly, despite all the hardship, according to a Greek poll the will of the Greek people is to remain within the euro. It is hard to understand how the leaders of Europe will risk the collapse of the euro and not ultimately stand behind Greece, but history is littered with examples of politicians doing the unexpected. Germany was the driving force behind the creation of the euro. Is it now risking being the architect of the euro’s downfall?
It was a news worthy weekend aside from the events in Europe, as China cut its benchmark interest rates by 25bp and its reserve rate ratio by 50bp, accelerating monetary easing. In contrast the Telegraph reports that bankers will be watching the latest US jobs data, believing a strong number will all but confirm the first rate rise in September.
The one caveat to that belief may be how the events in Europe over the coming days unfold. The ECB introduced their bond-buying program at the start of the year, and will be keen to limit any contagion in the euro area that may arise from the failure to reach an agreement with Greece. One measure ma includes stepping up the program. Federal Reserve members one assumes will be reluctant to raise rates during these uncertain times.
Some commentators have compared the possibility of Greece leaving the euro to Lehman style event. Unlike the Lehman collapse, the ECB and the rest of the banking system have had plenty of time to prepare for this eventuality.