Carbon prices shed 20c first thing on Monday morning to an intraday low of €7.25 on the December 2015 contract. With Greek banks shut for the week and capital controls in place the turmoil hit global markets. The ECB pulled the lifeline that has been keeping Greek banks liquid following a failure to agree on bailout terms. It is now down to a Greek referendum to decide on the bailout package on offer and nervous investors around the world headed for the exit on Monday morning.
According to Trevor Sikorski of Energy Aspects “It is likely that without bail out funds, Greece will now default on its IMF loan. In practice, this does not mean it will need to leave the Euro, but a default in 20 July of the €3.5 billion bond repayment to the ECB would probably end most hope of avoiding a Grexit. As such, this is a saga that could run for another three or so weeks before all of the permutations are understood.” He added “the Grexit is an issue about monetary union and it is not about membership in the EU. EU membership has never been at question and so issues around Greek participation in the EU ETS are simply not on the cards.”
Even if Greek carbon emissions trading entities were tempted to sell EUA’s ‘just in case’, unless they have overseas bank accounts it is unlikely to solve anything for them as there are restrictions in place that prevent them having access to the money. If the worst were to happen and there is a Grexit, the money may well disappear completely as the Greek banks will only be able to replace the Euro’s with Drachma, the value of which will be highly uncertain. Perhaps more pertinent is the negative effect the Greek crisis has on European economic growth and the subsequent fall in emissions.
In a note on the Greek crisis, Trevor Sikorski expects there to be much less downside to the Greek crisis than in 2011 when prices fell from €16 to €12. “The risks of significant contagion to other markets are lower. In 2011, the risks of financial contagion to neighbouring markets were seen as very high as the levels of debt held by the private sector were still significant. The intervening years have seen banks reduce their exposure to sovereign Greek debt, and this has at least allowed the ECB to conceive of a Greek default and exit.” Additionally “The EU ETS has far less non-compliance carbon emissions trading participants in the market than in 2011. At the time, there were a large number of market participants that had gone very long in expectation of further moves upwards on EUAs. Once prices began to fall sharply as these speculative longs started to get closed, more positions were stopped out and the downward price pressure just continued to grow.”
By the end of Monday morning carbon prices had recovered to €7.45 on the front December contract.