What would happen if Greece exits the euro?
“Nobody knows, because euro [membership] is supposed to be irreversible,” says Luc de la Durantaye, managing director of asset allocation and currency management at CIBC Asset Management. He manages the Renaissance Optimal Inflation Opportunities Portfolio.
In fact, “there’s no legal framework for how a country would move out of the Eurozone.”
Adding to the uncertainty, he says, is that “we’ve also seen a number of deadlines not being real hard deadlines because of that lack of legal framework, and because of [euro members] wanting to compromise.”
For now, tell clients a Greek exit wouldn’t happen automatically, or immediately, if the country defaults, says de la Durantaye. The process would be gradual, thereby lessening market shocks.
Another reason markets wouldn’t freefall, he adds, is that the Eurozone has put a number of new safeguards in place. For instance, its banking system is better capitalized. “So it’s less fragile to a Greek collapse. [And], the ECB has an asset-purchase program that becomes, in effect, the buyer of last resort, which is mitigating the sovereign bond impact of a potential Greek exit.”
But, in the short term, fears are still creating volatility and downside risk for equity markets. To hedge that risk, de la Durantaye suggests investors focus on U.S. treasuries and the U.S. dollar, given the strength of the U.S. economy and its limited exposure to Greece.
Other potential havens include the Swiss franc, the Japanese yen and gold — these may not be as effective, he says, but they could still insulate client portfolios.
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