Neil Williams, chief economist at Hermes, talks about the impact of Greece and the UK turning their back on the EU.
Speaking to Money Management’s Julia Faurschou, Mr Williams said: “Greece has proven, thus far, that it can take decisions, perhaps not yet the toughest decisions, and yet still remain within the club (European economic community).”
He argued that if Greece thinks life outside the system is easier in the short term, than being inside it, then it is potentially living a lie.
“If Greece were to leave tonight, at a stroke their debt would become foreign currency debt and lets say the new dracma would require much higher interest rates in order to support it and Greece would no longer be helped by it’s former eurozone peers.
“It seems to me default is probably on the cards in the eurozone, but thankfully for financial markets only about 10 per cent of that debt is now owned privately. The rest is owed to the IMF and other institutions such as the ECB.”
The potential for a UK exit from the EU is far more of a currency curveball, Mr Williams said. “Thankfully it seems far down the line, it is still expected to remain in 2017 to give the UK administration time to thrash out what is perceived to be a better deal.
“As we approach the referendum, the uncertainty could take the shine off the pound and probably also dent equities; the impact on UK gilts is a little less certain.
He added that in the short-term there is also the potential hit to growth, as the UK distances itself from its main trading partner, although this could actually help long conventional gilts.
“But there is also who will finance the gilts coming out? A third of our gilts are held internationally and they care about the pound and they care about foreign currency ratings.”
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