Greece


As Greek and EU ministers continue to debate the country’s third bailout, financial market participants are reacting to the uncertainty, including short sellers

Greece’s vehement ‘no’ to austerity, which received 61 percent of the vote during the referendum on 5 July, left the country on the brink of an exit from the eurozone. As Greek and EU ministers continue to debate the country’s third bailout, particularly the divisive conditions under which it will be issued, financial markets are reacting to the uncertainty.

Market reaction has been unsurprisingly negative, with European equities trading lower on the outcome of the 5 July Greek referendum on the international bailout conditions set by the EU, according to Heartwood Investment Management.

Hedge funds, meanwhile, have little to fear from the risk of instability in Greece, according to Lyxor, whose platform has shown they have limited exposure.

Only 11 funds on the Lyxor platform are directly exposed to Greece, a majority found in the event-driven and credit space. Of these funds, nine own Greek equities (local companies and banks). Around half of them have exposures to Greek sovereign bonds.

There is also dispersion in the aggregated net exposure to Greece among managers, ranging from 4.5 percent to 5.6 percent of net assets of the funds. Philippe Ferreira, senior cross asset strategist at Lyxor Asset Management, commented: “We estimate that the impact from future developments in Greece (losses or gains) would be limited for such funds.”

“A majority of them have sought to isolate this risk. Some have reduced their exposures; others have implemented hedging strategies. In a worst case scenario, we estimate that the losses would be limited.”

Short sellers have had little to do with Greece over the last 12 months, according to Markit. The aggregate value of all loans has averaged $50 million over the last six months, which is by far the least out of any eurozone economy, while utilisation has collapsed to $12 million in the wake of the latest crisis.

The Hellenic Capital Markets Commission reacted to the latest crisis by implementing a complete ban of short selling on 30 June. Originally intended to last until 6 July but extended until 13 July, the regulator issued the temporary ban of all short selling of any financial instruments on the Athens Exchange, as well as the Multilateral Trading Facility of the Alternative Market of the Athens Exchange.

The European Securities and Markets Authority backed the bans, given the “adverse developments which constitute a serious threat to market confidence” in Greece.

Markit analyst Simon Colvin added in commentary published in early July: “[Greece’s] lack of demand looks to be driven by the recent market uncertainty, as the aggregate value of Greek short positions actually fell in the weeks leading up to the short selling ban coming in to place. That number had stood at $60 million as late as April, just prior to the deterioration of talks.”

Colvin added: “The worsening situation also looks to have been impacting the supply of shares which lenders are willing to lend out, as total value of Greek securities sitting in lending programmes has fallen by over 40 percent since the start of the year to $880 million. This has outpaced the decline in the country’s equity market, so the drop in lendable shares can be attributed to the fact that lenders are either selling their Greek holdings or removing Greek shares from lending programmes.”

“Despite the fall in the quantity of Greek equities available to lend to short sellers, over 95 percent of the available pool has remained un-lent over the recent crisis as utilisation never breached the 5 percent mark. This means that the lack of shorting activity was driven by a lack of demand, most likely driven by market uncertainty, rather than any supply constraints.”

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