The view from the top

Watching the latest episode of the Greek drama unfold from meeting rooms on the top floors of New York’s high rises offers an interesting perspective. And for credit markets at the moment, it’s the right perspective.

As Europe’s political leaders shuttled between Brussels and their respective capitals several thousand miles away, PDI shuttled between meetings in New York. And in the offices of US-based credit specialists, the spectre of Grexit is of interest, but not a cause for concern.

Finance for Greek companies from international lenders dried up years ago. Even in the ultra-low interest rate environment, and amid a general scramble to deploy capital and source assets, Greece has remained on the blacklist.

This week the government in Athens defaulted on a €1.5 billion repayment. So its first real sovereign default (unless you’re being pedantic about debt reprofiling) was to the International Monetary Fund – a public body. Few private creditors are still exposed to Greece.

Previous prospects of Grexit – in 2009/10 and 2012 – saw wider fears of contagion, driven by the exposure of European banks (French in particular) to Greece via subsidiaries, inter-bank loans and government bond holdings. But international banks have cut their exposure to Greece from more than €140 billion in March 2008 to less than €40 billion in the third quarter of 2014, according to Bank for International Settlements statistics.

When it comes to the wider European banking system, the worst – in terms of negative impact from the fallout from a Greek bailout/debt write-down – has already happened.

The annus horribilis for European banks was 2012 when their cost of dollar funding soared and some were cut off by money markets. Bond and equity markets have remained relatively indifferent to the current crisis; even the currency markets have been surprisingly stable. And the events of 2012 won’t be repeated because everyone is out of Greece.

Everyone, that is, except the public purse. And Angela Merkel and the other European leaders haven’t blinked so far this time round. The European Central Bank, which has bought Greek sovereign debt at massive discounts, isn’t even offering to write down its profits on those purchases.

As sad and deeply disconcerting all of this is for the Greek people, markets are not reacting and Merkel isn’t moving because Greece doesn’t matter. Or rather, the matter is now political rather than economic. And that’s why, for credit markets, the New York perspective is the right one. At least in the short-term.

If Greece votes no in the bailout referendum on Sunday, European private and bank lenders alike will reopen for business as normal on Monday morning.

But, if Greece exits, the markets will inevitably start speculating on how long the euro will survive. So while the standoff between Alexis Tsipras and Merkel is a political issue, the fundamental economic flaw built into the heart of the euro remains – a fiscal union cannot survive outside a political union. And fixing that economic problem still lies in the hands of politicians.

So whatever happens this weekend, lenders in Europe must remain attuned to the economic fallout from the political theatre.