The Greek crisis: Another manic Monday

ANOTHER Monday, another sell-off dominated by news from Greece. The decisive No vote in the Greek referendum came as a surprise to most investors, just as the decision to call a referendum had caught out the markets a week before. And the initial reaction was very similar.

Asian equity markets fell with the Hang Seng index down 5.2% in Hong Kong and the Topix index in Tokyo down 2%. Perhaps the Chinese authorities had the most reason to regret the Greek decision; they had provided liquidity to support a sliding market but saw an initial 8% gain in the Shanghai Composite almost entirely dissipate.

Early indications were that the DAX in Frankfurt might fall 3% at the market open and the FTSE 100 index in London 2%. Meanwhile, on the currency markets, the euro fell around 1% against the dollar and the yen. All these market reactions were similar to those seen the previous Monday.

The big test will come later in the morning when bond markets open; will Spanish and Italian markets sell off, seeing the spread (or excess rate) over German bond yields widen? That was the issue in 2011 and 2012, when it was feared that several countries might be forced out of the euro zone. This time round, the European Central Bank has the firepower (via quantitative easing) to buy the bonds of Spain and Italy and hold down the yields.

Although the risks of a Grexit may have risen, some in the markets still expect a deal. The resignation of Yanis Varoufakis, the finance minister, may indicate a willingness of the Greeks to negotiate, although whether it is possible to produce an agreement that satisfies both the creditors and the Greek electorate is another matter.