Wave of contagion expected after dramatic weekend raises 'Grexit' chances

Sun Jun 28, 2015 6:40pm EDT
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By Jemima Kelly

LONDON (Reuters) - Global financial markets are braced for a wave of contagion from Greece on Monday, with expected heavy losses for southern European government bonds and regional stock markets as investors scramble to discount a possible "Grexit" that most had still assumed was unlikely as late as Friday afternoon.

Greece will keep its banks closed on Monday and implement capital controls after international creditors refused to extend the country's bailout.

"That is going to have a real big impact on markets and that will generate increased volatility," said Ian Stannard, European head of FX strategy at Morgan Stanley in London.

The Athens stock exchange will also be closed on Monday as the country tries to limit the financial fallout of the disagreement with the European Union and the International Monetary Fund.

U.S. equity futures dropped sharply at the beginning of trading Sunday, as the chances that Greece will default on its debt and exit the euro zone grew.

Greek Prime Minister Alexis Tsipras late on Friday surprised creditors by calling a snap referendum on what he said were the unacceptable terms offered to keep the country from bankruptcy.

Greece's European partners on Saturday shut the door to extending the existing credit lifeline beyond Tuesday night’s deadline, an extension that would have accommodated the planned July 5 referendum. The European Central Bank on Sunday then capped the amount of emergency financing it extends to Greek banks at last week’s levels despite reports of further heavy deposit withdrawals over the weekend.

Without new bailout funds, Athens is due to miss a 1.6 billion euro ($1.8 billion) repayment to the International Monetary Fund on Tuesday.   Continued...

A European Union flag flutters as tourists gather around a Greek flag atop the Acropolis hill in Athens, Greece June 26, 2015.  REUTERS/Yannis Behrakis