Breakdown in cash-for-reform talks between Greece and its lenders over the weekend has left the country teetering on the brink of a default and a subsequent exit from the euro currency bloc. Lack of progress in Greek debt talks jolted global markets on Monday. However, the broader impact on financial markets remains limited as the Eurozone economy also showed signs of progress.
Greece Debt Woes
Stocks plunged on Monday worldwide as Greece’s crisis worsened. The Dow suffered its biggest one-day point decline in over two years. The S&P 500 registered its largest one-day percentage decline since Apr 10, 2014. The pan-European Stoxx 600 also finished 2.7% lower, its biggest one-day percentage decline since Oct 2014.
Eurozone finance ministers rejected Greece’s proposal for a one-month bailout extension. Meanwhile, the Greek government called for a referendum on whether to accept the cash-for-reform measures as demanded by its creditors. The country’s parliament approved Greece Prime Minister Alexis Tsipras’ call for a referendum to be held on Jul 5.
The unexpected referendum announcement means Greece will certainly default on its debt payment to the International Monetary Fund (IMF) on Jun 30. Concerns about Greece heading toward a default forced the European Central Bank (ECB) not to provide emergency support to Greek banks. The ECB had increased the amount Greek banks can borrow under its emergency liquidity assistance program, but most of it has been disbursed to Greece.
The Greek government ordered its banks to stay shut through Jul 6 in order to prevent the country’s financial system from collapsing. Greece’s central bank imposed capital controls to curb the flow of money exiting the country. Daily withdrawals from ATMs have been limited to 60 euros. Trading in Greek stocks and bonds were also halted on Monday.
Differences on Debt Proposals
Greece’s new government’s electoral manifesto was to negotiate the terms of credit with its lenders and refused to comply with some of the austerity measures. However, continuous failure in negotiations indicated that creditors are reluctant to ease any austerity measures.
Major differences on fiscal proposals between Greece and its creditors continue to remain. Greece planned to hike corporate taxes to 29%, while its lenders limited the increase to 28%. Athens wanted to raise revenues by increasing social security contributions from employers and curbing early retirement. However, the IMF focused more on pension cuts.Greece’s creditors also wanted to double the country’s military-spending cuts to 400 million euros for next year. The austerity measures had put the country’s economy under stress.
A Greek default will result in writing off the quantum of debt, which will hamper Greece’s biggest lenders Germany and France. In the process, the export industry in the Eurozone will be affected, thereby hurting overall economic growth in the region.
Eurozone Economy Holds Up Despite Crisis
A contagion effect is, however, unlikely as Greece accounts for less than 2% of the Eurozone’s GDP. Even if such a scenario occurs, the ECB is equipped to take measures like unconditional long-term refinancing option and use its 500 billion euro stability fund to support both currency and bond markets.
Moreover, a Grexit is expected to be less painful than what it was in 2010 and 2012. In 2010, a major portion of Greece’s debt was held by private investors. That ratio has shifted since then as 80% of debt is being held by the government and institutions like the IMF and ECB. These organizations are better equipped to deal with a potential Greek default. Further, risks among foreign banks are less as they hold just $46 billion of Greek debt by the end of 2014, significantly less than $300 billion in 2010.
Fears of a domino effect are also lower as other troubled economies including Portugal, Italy and Spain are doing much better after going through their respective bailout programs. In fact, the Eurozone economy itself is in a better shape, expanding by 0.4% in the first quarter.
Additionally, the Markit’s purchasing managers index for the Eurozone climbed to 54.1 points in June, a 49-month high. Markit chief economist Chris Williamson said the Eurozone economy has so far weathered the Greek crisis relatively well.
3 Stocks to Beat the Greece Scare
Below we present three European stocks that may benefit from the underlying strength of the Eurozone economy. Thanks to our new style score system we have been able to identify value stocks which have incredible potential in the near term. A Value Style Scores of ‘A’ or ‘B’ when combined with Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy) offer the best investment opportunities in the value investing space.
Delhaize Group DEG is a food retail company based in Belgium. It operates supermarkets in Belgium, Luxembourg, Romania, Serbia, Indonesia, Greece and the US.
Delhaize holds a Zacks Rank #2 (Buy) and has a Value Style Score of ‘A.’ In the past two months, the Zacks Consensus Estimate for the current year was revised 3.6% higher. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 15.04.
Sanofi SNY is a French multinational pharmaceutical company that develops, manufactures and sells healthcare products.
Sanofi holds a Zacks Rank #2 (Buy) and has a Value Style Score of ‘B.’ Over the past two months, the Zacks Consensus Estimate for the current year was revised 7.3% higher. It has a P/E (F1) of 15.43x.
Luxfer Holdings PLC LXFR is a materials technology company specializing in the manufacture and supply of high-performance components and high-pressure gas-containment devices throughout the world including Europe.
Luxfer holds a Zacks Rank #2 (Buy) and has a Value Style Score of ‘A.’ In the past two months, the Zacks Consensus Estimate for the current year was revised 1.8% higher. It has a P/E (F1) of 11.22x.
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