July 6, 2015

Podcast: Greece Referendum Fallout

In this special edition podcast, Peter Jolly, NAB Global Head of Research, and Peter Hartley, NAB Business Markets - Foreign Exchange, discuss the latest developments in the Greece referendum fallout.

In this special edition podcast, Peter Jolly, NAB Global Head of Research, and Peter Hartley, Associate Director, NAB Business Markets – Foreign Exchange, discuss the latest developments in the Greece referendum fallout.

PJ = Peter Jolly – NAB Global Head of Research
PH = Peter Hartley – NAB Business Markets – Foreign Exchange

PH: Welcome to the National Australia Bank Business Markets special edition Greek Referendum Fallout podcast. We’re here today again with NAB Global Head of Research Peter Jolly to discuss the latest developments. Welcome Peter.

PJ: Welcome. Good morning all.

PH: The Greek people have spoken. After more than 5 years of austerity they’ve been asked to slash their pensions further and raise their taxes even higher. Is it any surprise with 25% unemployment and 50% Youth unemployment, that about 60% of the Greek people have decided to say NO to more austerity?

PJ: Look I guess putting it in that context perhaps this isn’t a great surprise. I mean running into last week we were thinking, and most people were thinking that the vote was really… (although the question was around more austerity measures), we thought the question was more going to be framed around do you want to stay in the Eurozone or not.

Certainly that’s what it felt like and the reports we were hearing from Greece were, (vote) YES to stay in the Eurozone and accept austerity, (or vote) NO to reject the austerity and move down some sort of unknown path. In the end Greece has decided, I mean the Greek people have decided to reject their creditors offer and so now we are in some sort of unknown period. As you say, I think the fact that 25% unemployment, and 50% youth unemployment (means) these are people who have been pretty oppressed for a number of years and so are still voting for not the devil they know but for something better. They’re in a hopeful situation and whether that is realistic or not I think can be seriously debated.

PH: So the people of Greece believe that Prime Minister Tsipras can now go back to the (European) Union in Brussels and renegotiate a better deal for their debt and for their ongoing obligations, what are your thoughts on that?

PJ: Well that would certainly be what Alexis Tsipras said to people, that if you vote NO I will come back to the European creditors and get you a better deal. I don’t think that’s necessarily how the European creditors think about this, and we saw the vice chancellor of Germany today say effectively that Greece has burnt more or less its last bridge to Europe. So they see it’s something a bit more grave than that. So here we are on this unknown path now. Alexis Tsipras perhaps a little bit deluded, thinks that he now has a mandate to negotiate a better deal but of course the creditors may have a very different idea about this.

PH: The Greek Finance Minister has come out and made a few interesting statements: one likening the threats of the European Union to financial terrorism, and the other more interesting comment is he’s decided that the Greek banks will likely reopen tomorrow. Is this something you see as potentially likely or completely unbelievable?

PJ: I think that’s a little bit unrealistic as well. So we are into a period of quite a lot of uncertainty right now. So what we do know is there’s a few things: so the Greek banks do not have enough money to operate in a normal way. They’ve been surviving on Emergency Liquidity Assistance from the ECB. That has just about run out. The only way they’re keeping it going as we know is they’re allowing people to withdraw only €60 from the ATM machines. So I think that is delusional to think that we can open the banks tomorrow and operate in a normal functioning way, because they just don’t have the money. I mean I presume that the bank of Greece will ask the ECB for new liquidity assistance to lift that, I think it’s highly unlikely that the ECB will grant it at this point. So I think for what seems likely for the next week at least, the Greek banks may be able to open their doors but they certainly will not be able to operate in a normal way. They will be on a drip feed still, I think very minimal withdrawals from ATM machines until this piece gets resolved. And we’re now onto a path where the ECB will stay its hand, keep them on minimum rations and then we’re going to be into the political sphere where we will perhaps see some new negotiations around debt packages, debt relief, and austerity.

PH: Peter, if we’ve got reports of the German and French leaders meeting today to discuss this situation and also an EU summit which is being called for Tuesday night Europe time, is there anything we can expect within the next two days or are we in a new stalemate?

PJ: I think we will see a lot of headlines and what we’re really, we’re in the realm of politics and not economics here. So the ball is definitely in the Europeans court, so effectively Greece has batted back across the net to Europe and Europe now has to decide, well the troika along(side) the IMF have to decide how they want to negotiate or if they want to negotiate with the Greek government. I think we will see a lot of headlines over the next few days and we will get a pretty good indication as to how willing or not they are to go back and renegotiate.

PH: If the probabilities of the EU providing emergency assistance to the Greek banks might be questionable now, what’s the alternative for the Greek Central Bank that have suddenly got a much more important role to play?

PJ: Well I mean they can’t really offer more liquidity to the banks under the current rules of the Euro system. I mean there have been talk around that they’re just going to print new euros or something in that order, but that would be essentially financially bastardry in a sense. It would sit outside all the rules of the Euro system. If the Greek central bank does not get Emergency Liquidity Assistance from the ECB they will just be stuck. I think they won’t be able to provide anything more to the Greek banks.

PH: Is the Drachma returning becoming a more and more likely probability?

PJ: So now we’re into the real heart of the scenarios. The two things that can happen are either the Europeans or the Greek government sort of blink a little bit and we get a new deal done, I mean a new austerity deal done with some debt relief and on we go. Then the ECB will allow the money to flow again to Greece. If we don’t get to that point then we have to say that the chances of them leaving the Euro system basically grow pretty quickly. It’s hard to put probabilities on these things because you have individuals playing, there’s a few moving parts. But certainly the probability of Greece leaving the euro is certainly much higher than they were on Friday and maybe around 40-50% or something in that order if you want to put rough percentages on these things. Now my own personal bias is, whether it’s this week or sometime in the next 5 years, Greece will probably end up leaving the euro system anyway. But whether it happens this week or next couple of weeks or not is very unclear. And the other thing to bear in mind is that there is no mechanism to kick them out. So they will have to effectively leave on their own choice. The complicating aspect of that is that as much as the people of Greece don’t like austerity, 60% of them voted against the package, 70-80% of them want to stay in the Euro system too. So they want their cake and they want to eat it too.

PH: Four in 10 people of Greece have decided that they were willing to accept the austerity package obviously. With more and more turmoil, with reports of resources running low, supermarkets running out of food, what’s the chance of some kind of internal strife, rioting, political backlash, do you think there would be issues in Greece?

PJ: I think the chances of that are pretty high. As I said I think it’s unlikely the banks will open in a normal functioning way this week… and there’s some issues around goods and access to goods. Both sides have to recognise that although it’s easy for people to pour scorn on the Greek people and the situation they’ve got themselves into or at least the government has got themselves into, we are potentially looking at a humanitarian crisis over the next period. Almost no matter which way things go.

PH: Peter we’ve come to another Monday morning two weeks in a row, Greece has been the talk of the markets and yet again China has done something that’s slipped below the radar. Can you give us a bit of an update about what the latest stimulus package is, how it’s come about and what it’s designed to achieve?

PJ: Sure. Okay so in many ways Greece has hogged the headlines, understandably in some ways, what’s been happening in China is perhaps more relevant for Australia. Actually one way of looking at how important that is, is that if you look at exchange rates people are looking at the Aussie dollar versus the euro dollar they might be surprised that the Aussie dollar is actually lower against the euro dollar over the last couple of days. And that really because the Aussie dollar has been pushed down by Chinese local developments. Iron ore fell another $5 (approx.) on Friday it’s sort of fallen to approx $55, a combination of concern around what’s happening in the slowing economy and a very direct concern around what’s happening in the Chinese stock market. It’s been celebrated that the Chinese stock market was up about 150-160% as of a month ago and it’s been in deep dive subsequently to that. It’s down about 5-6% on Friday, and down 12-15% for the week. We have seen more efforts by authorities to try and stem the decline. There has been a ban on short selling, so that’s effectively selling a stock that you don’t have. So there’s been bans and restrictions on that. At the weekend they moved to provide more, so effectively they moved to try and stabilise stocks by providing some new liquidity to one of the financial services companies and also we saw 21 of the large brokerage firms to band together to put together a bit of a war chest to buy blue chip stocks.

They put together around about US$20b equivalent that’s going to be in place this week. So they’re trying to stem the decline. Now why is this important? We’ve seen stock markets go up and down quite a lot in China, in fact the current up and down, well the up and down in 2007 was a much bigger up and much bigger down than the one we’re seeing right now. I think the difference now is that Chinese stocks are more widely held and the stock market capitalisation is higher than it was back in ‘07. Another thing to think about is we think there will be a negative wealth impact because they’re more widely held. Back in ‘07 where the situation perhaps house prices were rising and so that sort of had a big offset to the fall in the stocks, now we have both of them falling. And so there will be some negative wealth impact though on Chinese consumers. So when you see your asset prices declining, you tend to tighten the belt, get a bit more cautious and be a bit more pessimistic and spend a bit less. So that’s the knock on to Australia.

PH: Peter, you mentioned currencies. We’re seeing a heavy risk off environment on this Monday morning with obviously the flight to safety to US bonds, Swiss Franc, UK bonds, German bonds perhaps. We’ve seen the Aussie dollar come off heavily against the U.S. Dollar down to under 75c. What’s your view on the outlook of the AUD/USD and perhaps the AUD/EUR as well?

PJ: So the AUD/USD has just dipped under the 75c so that’s the lowest it’s been since 2009. I think it’s right to think that the risk is still to the downside for the Australian dollar versus US dollar. So we need to see how the Chinese developments play out and the Euro developments in the near while will be more likely negative than positive. Our forecast has had that the Australian dollar will decline to 73-74c over the 6-9 months and that would be the low point. Obviously we are pretty close to that point now. We haven’t revised our forecast at this stage but if we were thinking about the risk to that forecast then we would acknowledge that they are probably to the downside. One of the things that our forecasts had assumed was we probably wouldn’t see a NO vote for example, so now we’ve sort of on a different path. So I think we’re right to think there will be some downside pressure on the Aussie dollar, perhaps we’re going to end up a little bit lower than our medium term forecast. Against the Euro, it’s a bit more of a mixed bag. A lot will depend on what will happen in Euro negotiations this week. Our forecast again has had the Euro dollar which this morning is about 1.10, our forecast has assumed that it will be lower in the 1.00-1.05 bucket in the next 6-12 months. That still seems like a very reasonable forecast.

PH: And on the interest rate side of things, the talk out of America over the weekend, even though they had the 4th of July holiday, was that the Fed may need to push back that raising of their first rate hike to later in the year.

PJ: I think the U.S. data has been pretty good notwithstanding the payrolls we had last week. Our forecast has been that they move the interest rates in September and again in December. At this stage I think that’s still probably the best judgement you can make. But it’s pretty clear that if risks accumulate around China, around Greece, and the Eurozone then it’s more likely than not that those rate hikes may be delayed somewhat. But at the moment we’re saying that the U.S. economy is sufficiently strong and it really does need higher internet rates, so we would be sticking for now at least with the September move.

PH: Lastly the Reserve Bank tomorrow on hold?

PJ: Almost certainly on hold, they cut interest rates a few times earlier in the year. It’s been a sort of patchy response to that. I’m balanced ok, when we look at our NAB business survey, more firms are positive than not. And we have yet to see also the positive effects of the Federal Government Budget, which will come through, I think, over the next few months as well. We think the RBA will leave interest rates on hold here at 2.00% potentially for quite a while. If they’re going to do anything over the next 6-12 months the risk remains that they may need to cut interest rates again but I think they will be very reluctant to do so just for now particularly with house prices still rising pretty firmly in Sydney.

PH: So Peter Jolly we have a period of uncertainty, we have a lot of known unknowns, we have a lot of volatility we have a lot of politicians who have stepped in to fill the void of where economics used to be, is there anything else that we should be worried about or should we just hold on tight for the next week?

PJ: That’s a good question. There are a lot of pieces in play right now and we need to be aware of those one-off and those large risks which may take us on a different path. The one-off risks around Europe and perhaps the Chinese stock market are key points to think about. More generally though I think if you could extract from those, and it’s hard to right at the minute, there are still some good things happening globally. The U.S. is a very solid story, I touched a little bit on the Australian economy and we are seeing a bit of recovery evident in the non-mining parts of the economy. Perhaps not as strong as we would like and perhaps not as much business capital expenditure as we would like but there is some movement going forward. It’s very hard, finally what I would say, to forecast or plan around large one-off events that could take the global economy off on a different path and Greece and Europe are certainly one of those things. So you’ve got to be aware of those but you plan on the things you can best have a sense around and be aware for risks that turn up that might take you on a different path.

PH: We can only control what we can control. Peter Jolly, thank you very much for your time.

PJ: Pleasure.