CORRECTED-Europe''s firewalls may not be enough to stem Grexit investor panic
(Corrects 10th paragraph to read "anti-austerity parties", not
governments)
* Despite firewalls, Grexit would hit euro, bonds and stocks
* Investors to seek safe havens if Greece left euro zone
* Wariness to political contagion new factor since 2012
* Some see post-Grexit falls as potential buying opportunity
By John Geddie
LONDON, Feb 19 (Reuters) - For all the firewalls Europe put
in place over the last three years, the actions investors say
they would take if Greeceleft the euro currency bloc suggest
the ensuing panic would rumble through financial markets.
The imminent launch of a bond-buying scheme from the
European Central Bank has so far quelled the anxiety that in
2012, when Greece last looked set forthe exit, prompted a
steady stream of money out of the euro zone.
But this could quickly change if the current stand-off
between the new anti-austerity government in Athens and its
international creditors shifts the balance of probability
towards Grexit. [ID:nL5N0VT2EC] [ID:nL5N0VT1WM]
Investors say the euro would take a hammering as foreign
funds sought shelter in U.S. and British assets, euro zone
stocks would fall, and borrowing costs in the bloc's low-rated
countries would soar asthose obliged to stick with Europe tried
to stem losses by buying German government bonds.
"A lot of international investors would use it as an
opportunity to just sell to the ECB and leave the euro area,
similar to what we have seen before," said Patrick O'Donnell of
Aberdeen Asset Management, a fund with over 400 billion euros
under management.
Before talks on Friday which could be the last chance for
Greece to grab a financial lifeline before its bailout expires
on Feb. 28, AustrianChancellor Werner Faymann said no one could
calculate the possible contagion from a Greek exit.
[ID:nV9N0U001B]
U.S. investment bank Morgan Stanley had a stab this week,
advising clients how to limit losses in such an event - ranging
fromstaking bets on the euro weakening and U.S. and British
bond yields falling, and insuring banking stocks against
default.
But there is little evidence as yet of investors protecting
themselves against a Grexit threat. [ID:nL6N0Q20B6]
Thelatest Reuters polls show only 25 percent of economists
think Grexit will happen this year, far less than the 90 percent
chance Citigroup attached to such an outcome at the height of
the debt crisis in 2012.
Markets, outside Greece, have barelystirred even with
anti-austerity parties in the likes of Spain and Ireland also
rising to prominence.
Aberdeen's O'Donnell remains heavily invested in the bloc's
low-rated peripheral bonds, waiting for the ECB to buoy prices
further when itlaunches quantitative easing in March.
Gareth Colesmith, a portfolio manager at Insight Investment,
said that without the prospect of the ECB's scheme, borrowing
costs in the bloc's other weak links - Portugal, Italy and Spain
- would already bea lot higher.
This is was what happened in 2012, as investors became
convinced that Greece leaving would create a domino effect
eventually resulting in a break-up of the union and a return to
pre-euro currencies.
Since then, the ECB haspledged to do whatever it takes to
save the euro, Europe's financial system has been through a
comprehensive health check, and the ECB has unveiled QE, which
many see as a road-map towards debt mutualisation.
But, says Insight's Colesmith, it maynot be enough.
"If the shift of investor sentiment is sufficiently large,
it will only cushion the blow rather than prevent it."
International funds could pull investments out of the euro
area, exacerbating a fall in the currency that couldsee it
tumble towards parity with the U.S. dollar.
Hedge funds may then start to prey on countries most likely
to follow Greece out the door. Portugal, the only other country
to have junk-rated debt, is an obvious candidate.
POLITICAL CONTAGION
Unlike in 2012, potential political contagion could also
become a factor in investment decisions.
Spain too could be targeted with the Podemos party - a
hard-left ally of Greece's Syriza - leading the polls before
elections inDecember. [ID:nL5N0VM4DM]
"It would be very much a case of picking off the weakest
members of the herd," said Kerry Craig, global market strategist
at JPMorgan Asset Management.
For some investors, a post-Grexit selloff could have a
silverlining. Julien-Pierre Nouen, chief economist at Lazard
Frères Gestion in Paris, said that with European growth
improving, signs of banks lending again and QE in prospect, the
firm remains overweight euro zone equities.
"We would be buyers on anymarket weakness. If the market
falls by 10 percent we would certainly be buyers," he said
Money managers that have to remain invested in the bloc,
would initially turn to the safest assets if the bloc fractured.
Many would buy Germangovernment bonds - an uninviting
prospect when easy central bank policy has driven yields on much
of this debt below zero, effectively meaning investors are
paying for the privilege of lending.
"It is really a question of fear versus greed a lotof the
time in financial markets and, if fear takes over, bonds will be
bought even at these levels," said Mark Dowding, a portfolio
manager at London-based fund Bluebay.
