Greek contagion risk is limited

Greek money flies out

Eurozone headlines continue being flooded by news and speculations on whether Greece will have enough liquidity to service its payments as June 5th repayment date approaches. Greece should pay pensions, salaries and some 300 million euro debt to the IMF this week. Another 1.3 billion euro is due to the IMF by June 19th. As the liquidity conditions become alarmingly tight in Greece, the PM Tsipras has little alternative but to secure an agreement with his EU peers as quickly as possible. According to ECB’s single supervisory board member Dombret, domestic customers withdrew some 30 billion euros from Greek banks.

There is little chance for the Greek situation to be clarified this week, as the country will most probably be given the flexibility to service its debt in one shot by the end of June. However the problem is only being postponed as Greece’s coffers will not be miraculously filled with cash by the end of the month, if the country refuses to compromise on austerity plans. Heavy outflows signal that Greek population will not comply with EU’s austerity plans and are ready to step out of domestic banks to avoid any restriction on their individual accounts.

Greek contagion risk is limited

A potential Greek default is expected to have little financial impact on the rest of the Eurozone. First, Greece is not considered as too-big-to-fail; ECB’s Dombret says German banks have no more than 2.4 billion euro exposure to Greek banks, companies and the state. Second, the Greek situation is hardly comparable to any other peripheral countries, keeping Greece in a fully separate risk category.

European markets

The European bonds made a bullish start to the week. German 10-year yields broke below 0.50%; the spread with peripheral yields widened. What keep the European bonds well supported are the ECB purchases. The rush into German bonds will certainly remain a bit more contained given that the higher price volatility in bunds, especially following the sell-off in May, has been a warning that taking advantage of market anomalies is never without risk. However as the risk-off sentiment dominates in the European markets this week, the German bunds still offer interesting protection against Greek related risks.

Euro complex trades mixed this morning. Traders are tempted to sell the rallies as an event related sell-off can occur at any time. EURUSD sees resistance at 200H MA (1.0992), with Fibonacci’s 38.2% on March-May retracement (1.0843) being the next target. Decent option related offers trail below 1.0850 and should give weigh further on EURUSD if activated. The key support stands at 1.0458/1.0500 (12-year low).

As weaker euro boosts appetite in currency sensitive big caps; the risk-off refrains investors from building fresh positions in their European equity portfolios before any good, or bad news come out of Greece. DAX erased early gains as automobile sector pared early 0.80% surge. The support could be found at 11338.90 (100-dma), if cleared should open the way to 10847/11000 (Fib 61.8% on Oct’ 14 - Apr’15 high/psychological threshold).