The plot continues to thicken in the latest act of the Greek bailout drama. Greece’s economic woes have been bubbling for at least five years and are now, finally coming to a head. It appeared that Athens would finally acquiesce to the bailout offered by its creditors. However, when put to a referendum, 61% of the Greek people voted against the deal. The country has as a result defaulted and is effectively bankrupt. We are in truly unchartered territory, with the country’s place in the Eurozone now far from certain. The situation throws up a whole range of questions and possible scenarios.
Most pertinently of course, for the Greek people. Although Prime Minister Alexis Tsipras is being feted by many Greeks as a hero standing up to the country’s greedy creditors, capital controls are starting to take their toll as people find their daily business restricted. In the latest twist, Greece’s outspoken Finance Minister Yanis Varoufakis has resigned, considered a popular move among Greece’s creditors searching for a way forward.
However, the potential ‘Grexit’ from the Eurozone throws up as many questions for the country’s European neighbors as it does for Greece itself. The Greek economy may be the size of Connecticut’s, but this could be outweighed by the impact beyond its borders on the rest of the continent. Frank Friedman, CFO of Deloitte LLP summed up the uncertainty, saying “Nobody really knows where the Greek situation will end up. Nobody.” There is certainly the danger of contagion. Greek banks have a moderate presence in Romania. Meanwhile, Hungary, Czech Republic and Poland have perhaps the strongest ties to the Eurozone and would appear particularly vulnerable. And then of course, there is the potential fallout in European markets. Corporate confidence in Europe would surely be hit whatever happens. Neither a shrinking of the Eurozone nor apparent capitulation to Greek demands would likely yield a positive result. In the meantime, the ongoing uncertainty can only breed ever-more cautious investment in Europe. Unsurprisingly, markets from London to Paris, Milan and elsewhere have dipped since Greece voted to reject the bailout deal.
However, the timing of the Greek debt crisis may well limit the potential fallout. 2015 is not 2010 and European economies such as Spain and Ireland, which found themselves in a precarious situation 5 years ago have made something of a recovery. Europe is less vulnerable than it once was and consequently European leaders will still feel that they very much hold the upper hand in their dealings with Greek premier Tsiprias and his government. In addition, the fact that Greece’s creditors are overwhelmingly governmental and institutional bodies means that the chances of a Lehman-style domino effect are slim.
Nonetheless, there will be an impact on many aspects of Europe’s economic life, including real estate. There has been a relative and impressive property boom in Europe of late. During Q1 of this year, 13 European housing markets saw prices increase more than during 2014, some to a remarkable degree. For example, Ireland has seen prices boom by 17.5% during the past year. This kind of progress may be slowed down somewhat by the Greek uncertainty. As Andrew Burrell, the head of forecasting at a major real estate broker explained, European real estate may experience some “reticence” when it comes to investors making a decision. Some believe though that this kind of temporary slowdown could help cool a market growing dangerously quickly.
Could Europe’s troubles have an impact Stateside, especially in New York itself? The chances appear to be low. Borja Sierra, head of US capital markets at Savills Studley estimates that there are “very few” Greek investors in New York. Although international investors may see some of their properties lose value in Greece and other vulnerable European countries, Sierra says “It’s not evident that they’ve triggered sells.” If anything, the latest Greek tribulations can only strengthen the New York market. A Moody’s expert predicts that with confidence in Europe having been shaken, some elite investors may look to shift their assets to the safest market of them all, forecasting an “upside to the New York real estate market.”
Greece is capturing the headlines and well it might, given the unprecedented nature of the situation. However, the Greek economy has limited leverage and its absence from the Eurozone would likely hurt Athens more than anyone else. Now, if the UK were to vote to leave the European Union in a referendum expected before 2017, then that is the kind of European trouble which could have truly global implications…