Greece votes No

Not many commentators were confidently predicting a No vote in the runup to the Greek referendum, so the fact – and the scale – of the result will likely have surprised a lot of people.

The immediate aftermath saw European stock markets dropping around 1.5% but the wider implications, particularly for our domestic lending market, are hard to anticipate. We have already seen steady increases in the cost of funding since early Spring, but that hasn’t been reflected in mortgage rates yet – if anything they’ve fallen lower. Presumably lenders are so hungry for business (and so far this year lending is lower than at the same time in 2014) they’re able to ride it out for the time being.

So that suggests no immediate cause for concern, but it can only go so far – there’s no point lending lots if you don’t make any money from it – so any increase in market rates is bound to put pressure on mortgage pricing.

The greater and less certain risk is the impact on overall liquidity – the willingness of financial institutions to lend to each other, and us, in a highly uncertain environment. UK banks have relatively little direct exposure to Greece so the direct consequence of, say, Greek banks going under or a forced exit from the Euro would be limited. But should that happen the impact on the financial markets could be profound.

The worst case scenario would be fear spreading about the other Southern European states (and let’s never forget that markets are largely driven by emotion – spook enough traders and calamity will surely follow), but even without that, a failure to reach a deal on Greece would take us into entirely unknown territory. It would be hardly surprising, then, if banks and other institutions decided they’d rather put their cash under the mattress for a little while, thank you very much.

Then the concern here becomes not what rate I can get on my mortgage, but are there any mortgages to get?

Happily we have seen that consequence before; the last time Greece looked on the brink, with a good chance that Spain and Italy would follow, and the Bank of England came up with the Funding for Lending scheme to stand in place of the squeezed financial markets. That scheme is now closed and pretty much all the funds used up, but one would hope that something similar could be rolled out. No doubt this is one of the items on the agenda when the Prime Minister, Chancellor and Bank Governor meet.

By all accounts there are a couple of days left before Greek banks literally run out of money so if a deal can be struck in that time, stability should return – at least for a while. If not, it could be a hairy ride.

 

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