The situation in Greece continues to deteriorate. A last-minute bargain proffered by European Commission President Jean-Claude Juncker appears to have been rejected as the nation prepares for a referendum on Sunday. In a televised speech, Greek Prime Minister Alexis Tsipras indicated that he would step down if voters decide to accept the austerity measures demanded by creditors, while capital controls have left savers standing in hour-long lines to access cash in small increments. With no solution in sight, markets remain choppy as investors attempt to calculate the potential impact of a Grexit, a Greek exit from the euro.
U.K. GDP improves. Revised first-quarter growth data released by the Office for National Statistics today grew at a pace exceeding consensus forecasts. Headline GDP expanded at an annualized rate of 2.9 percent, a 0.5 percentage point improvement. Of note was a rise in real household disposable income, which 4.5 percent year-over-year, rose at the fastest annual pace since 2001.
Willis Group and Towers Watson to merge. Insurance brokerage Willis Group Holdings and risk advisory company Towers Watson today announced an agreement to enter into an all-stock merger creating a $18 billion firm in terms of combined market capitalization. The new entity, to be named Willis Towers Watson, will be domiciled in Ireland.
German unemployment remains unchanged. The headline unemployment rate remained unchanged in Germany at 6.4 percent during June, in line with consensus forecasts. According to the Federal Statistical Office, the total number of jobless declined by 1,000 versus an anticipated 8,000.
Shanghai stocks remain volatile. After being in the red by as much as 5 percent, the Shanghai Composite index rose by over 2 percent intraday as investors recalibrate expectations. Stocks on the Chinese mainland rallied in part because of news that government-controlled pensions will be allowed to invest in equities for the first time, a move that may introduce up to $100 billion in fresh capital to the market.
Puerto Rico seeks restructuring. In a televised speech yesterday, Puerto Rico Governor Alejandro Garcia Padilla addressed constituents, saying that bondholders must bear a portion of the burden in solving the commonwealth’s debt crisis. He also called on the U.S. government to allow the island territory to enter bankruptcy protection. Steven Rhodes, the former bankruptcy judge retained by Detroit to oversee its bankruptcy, has been brought on board to advise Puerto Rico as it seeks to discharge a portion of its $73 billion in debts.
Portfolio Perspective: Thoughts on the Referendum in Greece — Maria Vassalou, Perella Weinberg Partners
Unless the creditors soften their demands, a no vote in Greece’s upcoming national referendum on the country’s international bailout implies the Mediterranean nation will leave the euro zone. A softening from creditors will increase the likelihood for left-wing parties to be elected elsewhere in Europe — and in Spain and Portugal in particular. I think the gamble they are likely to take is a tough stance on Greece in order to halt the austerity revolt from the other weak links of the euro zone.
A Greek exit automatically effectively converts the euro to a fixed exchange-rate mechanism vulnerable to speculative attacks. While we may see some of the contagion immediately, I expect most of it to manifest itself over prolonged periods of time. Recall that the Swiss National Bank maintained its cap with the euro for about three years before it became prohibitively expensive to continue defending it. The speculative attacks will be primarily on government bonds, with Spain and Portugal being more vulnerable as their debt markets are less liquid than Italy’s.
A conversion of the euro to a fixed exchange rate mechanism will also be a blow its aspirations of being a reserve currency. While the immediate response may be an appreciation of the euro, the medium-term effect may be negative for the currency because its credibility as a compact currency will suffer.
Independent of the outcome of the referendum, the dynamics of the euro zone are bound to change nonetheless. The increased uncertainty is likely to prevent inflation from returning to its target rate in the near future and economic growth will face headwinds.
Depending on the severity of the developments over the next couple of weeks, we will see some degree of spillover to the global economy. One of the many questions that remain is whether this is a Lehman moment or not. It might be — but I think nobody can answer this question with great certainty at this point.
Maria Vassalou is a partner and portfolio manager at Perella Weinberg Partners Capital Management in New York.
