GREECE PLAYBOOK

By Burt White Chief Investment Officer, LPL Financial
Jeffrey Buchbinder Market Strategist, LPL Financial

Weekly Market Commentary, July 10, 2015

Greece’s critical referendum took place this weekend and the Greek people resoundingly voted “no” — rejecting the latest bailout deal from creditors. The referendum result, which some interpreted as a vote to exit the Eurozone, throws Greece’s future in the currency union firmly in doubt. The unexpected result has led to a roughly 2% decline in the broad European indexes but only a modest decline in the S&P 500 (as of 3 p.m. ET today, July 6, 2015). The negative market reaction in Europe is not surprising, given polls heading into the weekend suggested a vote for the bailout was more likely. The modest decline in the U.S. may suggest markets are increasingly comfortable with the situation.

Here we try to answer the following questions:

1. Would a Greece exit (Grexit) from the Eurozone lead to contagion for
global markets?
2. Will this latest Greece crisis result in a Lehman moment?
3. Is a deal that keeps Greece in the Eurozone still even possible?
4. Does anticipated weakness in European equity markets present a
buying opportunity?

We address these questions here and provide our playbook for investing in
this environment.

ASSESSING CONTAGION RISK

We know the stock market does not like uncertainty, so the prospects of Greece’s exit, which is now potentially greater than a 50% probability, are unsettling. No country has ever left the Eurozone, and there is no blueprint for how to do so. As we list below, there are several reasons why we expect the risk of contagion to be manageable.

Little private ownership of Greek debt. More than 80% of all Greek government debt is held by government agencies and central banks. Given how little Greek debt is held by private investors, we believe the global financial system should be able to manage prospects of Greece defaulting on additional obligations (the next payment is 3.5 billion euros due to the European Central Bank [ECB] on July 20). Derivatives…

Given how little Greek debt is held by private investors, we believe the global financial system should be able to manage prospects of Greece defaulting on additional obligations.

exposure tied to Greek default cannot be precisely measured; however, we know banks are much better capitalized than they were when the Greek debt crisis bubbled over in 2012, and the data we do have for the banks suggest exposure is limited.

Bold ECB. The ECB’s willingness to “do whatever it takes” to keep the Eurozone together, and its aggressive bond buying program — which it can accelerate — suggest that it will step in to stem any signs of contagion. Should Greece’s problems remain simply Greece’s problems, the Greek crisis will be contained. Regardless of the path Greece takes, we expect the ECB could be very aggressive to ensure that markets beyond Greece continue to function as normally as possible.

Improved European economic backdrop. The European economy has been strengthening. European exporters, particularly Germany, have benefited from the..

Read the full Market Report here: Market Commentary 07062015

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