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    GSAM Connect 
    |
    July 1, 2015

    GSAM Connect | July 1, 2015

    Putting Greece in Context

    Markets reacted this week to a breakdown in negotiations between Greece and international creditors. Amid the volatility,1 we believe investors should keep their focus on the broader backdrop. In particular:

    • The global economy continues to grow, including in Europe. We believe this trend is unlikely to change in light of the events in Greece.

     

    EXHIBIT 1: TOTAL FOREIGN CLAIMS OF EUROPEAN BANKS AGAINST GREECE

    Total foreign claims of European banks against Greece today are well below the levels of the 2011 European sovereign debt crisis. 

    EXHIBIT 1: TOTAL FOREIGN CLAIMS OF EUROPEAN BANKS AGAINST GREECE

    Source: Bank of International Settlements and Goldman Sachs Global Investment Research. Data reflects total foreign claims of European banks against Greece on an ultimate risk basis, Dec. 31, 2005-Dec. 31, 2014.

    • We do not expect a repeat of the 2011-12 systemic threat to the Euro area, largely due to a shift in Greek counterparty exposure away from the private sector to the official sector – See Exhibit I for the drop in European banks’ claims against Greece compared to recent history. Our base case expectation is that Greece will remain part of the Eurozone.
    • We believe global markets have taken the week’s developments in stride. While the S&P 500 Index on Monday suffered its biggest one-day drop since April 2014,[1] the decline of 2.1% was about half the largest daily losses seen during the 2011 European sovereign debt crisis.
    • Although the outcomes of the July 5 referendum in Greece and Greece’s latest proposal to creditors are each uncertain, the European Central Bank (ECB)’s quantitative easing program has been supportive of European markets. We believe the ECB may ease further if markets become more volatile.

    Greece may be dominating headlines at the moment and market volatility may continue, but we believe economic data may shed more light on long-term fundamentals than short-term market events. Just this week, for instance, readings of consumer confidence on Tuesday and US manufacturing on Wednesday exceeded expectations. Monthly jobs data on Thursday potentially may bring more welcome news.

    Topics: Manufacturing, Jobs Report, ECB, Europe, Volatility

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