Greece only makes up 0.3% of the global economy, but it’s causing a global stock market sell-off, including in the United States.
The Dow shed over 140 points Monday morning, the S&P 500 fell 0.8%, and the tech-heavy Nasdaq lost about 0.9% in early trading. Asian and European markets are even deeper in the red. Germany’s main DAX index is down over 2%.
Investors don’t like uncertainty, and Greece is the poster child for “up in the air.” While its debt problems are well known, investors were not expecting Greece to call for a July 5 referendum vote for people to weigh in on whether to accept the latest bailout terms from Europe and the International Monetary Fund. UBS dubbed the vote a “significant surprise.”
On top of that, the decision by the European Central Bank on Sunday to provide no new emergency support to Greek banks makes a “Grexit” seem even more likely.
Capital Economics now says there’s a 50/50 chance that Greece will leave the euro. UBS puts the probability at 40%. Greece would become the first nation to do so.
“There is plenty of scope for renewed volatility in the event of a near-term Grexit, the risk of which we think probably now exceeds 50%,” wrote Capital Economics chief market economist John Higgins.
What’s next? Greece faces a critical deadline on Tuesday, when it must make a loan €1.5 billion ($1.7 billlion) payment to the IMF. The country looks almost certain to default on that payment. In total, Greece owes about €330 billion ($367 billion) to creditors, mostly the IMF and other European nations.
While stocks are sliding, the U.S. dollar and bonds were winners. The U.S. dollar gained ground against the euro, and the 10-year bond yield fell as low as 2.36% as investors looked for safety outside of Europe.
Greece’s stock market is closed Monday. The country has shut its banks to prevent money from leaving the country.
While this week is likely to be rough for markets worldwide, the longer-term impact may be limited. Goldman Sachs notes that Europe is much better prepared for a Greek crisis and default this time than in 2011-02 when Greece was last on the brink of a Grexit.
“While broader European markets are likely to show some response, we do not expect the impact to run to the systemic and existential threats to the Euro area as a whole that emerged back in 2011-12 when Greece was last center stage,” Goldman wrote in a note Sunday.
