European Affairs


Financial markets have climbed and retreated with each twist and turn of the negotiations to address Greece’s debt burden and implement austerity measures, but these fluctuations – volleying between “Grelief rallies” and “Grexit angst” – in bond, stock, and Euro currency values have remained within a narrow band. Investors’ fears of “contagion” and the EU’s implosion are tempered for now.

Following the closing of Greek banks and the imposition of capital controls when the European Central Bank capped its Emergency Liquidity Assistance amid the floundering EU-Greece bailout talks, European and U.S. equity markets fell on June 29. London's FTSE 100 index dropped 1.97 percent and Germany's Dax index tumbled more than 3.5 percent while the Dow closed 1.95 percent lower. The markets would soon recover from these steps backward. The Euro, however, was nudged down only slightly, 0.12 percent lower against the dollar at $1.1179 that day.[1]

After Greeks voted against the EU’s bailout package on July 5, Asia’s markets, the first to respond, tumbled. Japan’s Nikkei stock index slid 2.3 percent in afternoon trading at 20,063.3, South Korea’s Kospi dropped 1.6 percent to 2,070.89, and Hong Kong’s Hang Seng index fell harder, 4.23 percent to 24,960.73.[2] But for Europe’s markets, opening on Monday, there was no sign of widespread panic, with the drops not nearly as sharp as those earlier in Asia. The main German and French indices fell about 1.5 percent, while the U.K. FTSE dropped half a percent.[3]

This referendum was “not a ‘black swan’ moment,” wrote Holger Schmieding, chief economist at Berenberg Bank in London.[4] “Black swan” refers to highly improbable, unforeseen market events that have enormous, highly unpredictable effects. As rare and startling as a black swan is, so too are these events.

“First, [a black swan event] is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility,” explains its popularizer, Nassim Nicholas Taleb. “Second, it carries an extreme impact. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.”[5]

On July 13, after a bailout deal was reached before dawn between the EU and Greece’s leader, Alexis Tsipras, European and U.S. markets expressed “Grelief,” as headlines put it. Eurozone stock benchmarks inched higher, with Germany’s DAX index up 1.5 percent, France's CAC 40 gaining 1.9 percent, and Britain's FTSE 100 adding 1 percent. The momentum crossed the Atlantic with the Dow and the S&P 500 each gaining roughly 1 percent.[6] European and U.S. equity markets rose further the next day despite news reports that Greece’s parliament would reject the bailout terms agreed to early July 13. After legislators approved the reform package, though, early on July 16, markets continued upward, posting gains for the week of roughly 2 percent.

What these gyrations suggested is the weight of Greece to the European and global economy was small and that other concerns were more critical – from the Federal Reserve’s timetable for interest rate hikes to the slowdown in China to the drop in oil prices. "Wall Street people learn nothing and forget everything," said Benjamin Graham, who personified market dynamics as “Mr. Market” to emphasize how human emotions drive securities’ values.

Neil Irwin encapsulated best the market’s overall sentiment towards Greece’s difficulties in his analysis. “Financial markets are concerned and think that the Greek crisis could damage the earnings of European companies and make investors a bit more wary of the debt of other Southern European countries. But they’re not remotely betting that the situation will spin out of control and lead to a full-fledged unraveling of the Eurozone or a recession across Europe.”[7]

Roughly the size of Connecticut’s economy, Greece’s GDP economy is a small percentage of the EU even though it is the thirteen largest member-country.[8] Five times as big in square miles as Massachusetts,[9]  Greece’s GDP is half that of Massachusetts. The country accounts for less than 1 percent of all U.S. trade.[10] As one editorial write pithily put it, “Compared with the size of Europe’s gross domestic product, both the Greek economy and its debt are rounding errors.”[11]











 Source: Trading Economics:












Source: Slate, February18,2015:















Source: Economist:

 “The links between other Eurozone countries and Greece are modest,” writes Rebecca Keats. “Exports to Greece—excluding Cyprus—represent less than 0.5 percent of Eurozone exports. The global banking system has reduced its Greece exposure, from a massive $300 billion in 2008 to $54 billion as of mid-2014, according to Deutsche Bank (DB).”[12]

Investors holding mutual funds and exchange-traded funds, portfolios of stocks that trade like equities on stock markets, had negligible exposure to Greece, as pointed out by wealth manager Kevin Mahn of Hennion & Walsh Asset Management. He noted that the FTSE Europe ETF (trading symbol: VGK) has a 0.07% allocation to Greece (as of May 31) and the iShares MSCI EAFE ETF (EFA) did not allocate any money to Greece (as of May 31).[13]

More significant in investors’ minds is the recent roller coaster market ride of China’s stock markets. The early July swoon exceeded $3.3 trillion dollars -- the equivalent of 14 Greeces.[14] China’s growth is slowing at best to 7 percent, according to government statistics, and likely lower given the questions over the quality of the official numbers. Signs of trouble are suggested in “net capital outflows,” the amount of money flowing into China against the amount flowing out. This outflow reached $800 billion over the past year, according to Charles Dumas at Lombard Street Research.[15] Pervasive excessive overcapacity has led to deflation. Signs that industrial production has sharply dropped are seen in sharp falls in electricity usage rail freight dropped. Private credit exceeds 160 percent of GDP, an unsustainable level. Stock valuations suggest a bubble as retail investors piled in the first half of this year.picture44spellman










 Source: Daily Telegraph, July 22, 2015:












Source: Fortune, July 10, 2015:

 Earnings season and a wave of mergers and acquisitions involving U.S.-based companies has had more importance for investors in July than Greece, too. Better than expected earnings for Google and its tighter cost controls in the second quarter caused the stock to leap 16.3 percent in one day on July 17 (increasing market capitalization by about $65 billion). That same day, Facebook’s stock hit an all-time high, too.

M&A activity was at a feverish pitch in the first half this year. “Global M&A rose 38 per cent compared with one year ago to $2.18 trillion in the first half, the highest since 2007, according to Thomson Reuters data.”[16]

The recently announced acquisition by health insurance giant Anthem of another, Cigna, in a $54 billion deal underscored the scale of M&A deals and titanic shifts going on, for example, in the U.S. healthcare industry, partly driven by President Obama’s health reforms law. Large, slow-growing companies in other sectors are buying companies to boost growth and profits.

The Federal Reserve’s timetable for raising interest rates also factors heavily into investors’ thinking. In her semi-annual testimony to Congress, Fed chair Janet Yellen said an interest rate increase this year would be “appropriate” if the economy remained on the expected path of growth. The timing of that increase, Yellen said, was less important than the pace of subsequent increases.

“Looking forward, prospects are favorable for further improvement in the U.S. labor market and the economy more broadly,” Yellen said before the House Financial Services Committee. “A decision on our part to raise rates will say no, the economy doesn’t stink. We’re close to where we want to be.”



[1]BBC, Greece debt crisis: Global stock markets slide.” June 29, 2015. 

[2]Justin McCurry, “Greek crisis: financial markets buffeted after no vote.” The Guardian, July 5, 2015. 

[3]Fox News, “Financial markets react after Greece bailout plan rejected, finance minister quits.” July 6, 2015.

[4]David Jolly and Keith Bradsher, “Greece’s Debt Crisis Sends Stocks Falling Around the Globe.” New York Times, June 29, 2015.

[5]Nassim Nicholas Taleb, “The Black Swan: The Impact of the Highly Improbable.” New York Times, April 22, 2007. 

[6]Kim Hjelmgaard,“Relief but not euphoria for Europe markets.” USA Today, July 13, 2015.  

[7]Neil Irwin, “Why aren’t markets freaking out more about the Greek crisis?” Financial Post, June 30, 2014.

[8]Rebecca Keats, “Greek Debt Crisis: Global Markets Worried but Not Panicked.” Market Realist, July 9, 2015. 

[9]Elena Holodny, “13 mind-blowing facts about Greece's economy.” Business Insider, June 24, 2015. 

[10]Ylan Q. Mui, “What the crisis in Greece means for the U.S. and global economies.” Washington Post, June 29, 2015. 

[11]Greece is only the European Union’s first Trojan Horse.” Editorial, San Francisco Chronicle, July 7, 2015.

[12]Rebecca Keats, “Greek Debt Crisis: Global Markets Worried but Not Panicked.”, July 9, 2015. 

[13]Kevin Mahn, “The Impact Of Greece On Financial Markets.” Forbes, June 18, 2015. 

[14]Stephen Gandel and Stacy Jones, “China's stock market swings, as measured in Greek economies.” Fortune, July 10, 2015. 

[15]Ambrose Evans-Pritchard, “Capital exodus from China reaches $800bn as crisis deepens.” Daily Telegraph, July 22, 2015. 

[16]James Fontanella-Khan, Arash Massoudi and Joe Rennison, “Record valuations drive 2015 M&A boom.” Financial Times, June 29, 2015.