Saturday, June 27, 2015

It's Now (presumably) Up to the Greek People

If you paid attention to European equity, debt and currency markets last week, especially Friday (clearly the markets thought that a short-term Greek deal would be struck this weekend), and have been listening to me say that the political risk is too great for both sides to not come to a short-term deal, as of this moment, you might be shocked.

Amid serious talks that many believed would, at a minimum, yield sufficient relief to get Greece through next Tuesday's payment to the IMF, the Greek negotiators were yanked from the meeting. Soon thereafter it was announced that Prime Minister Alexis Tsipras had called for a referendum to take place on July 5th. The Greek people will vote as to whether to adhere to the latest conditions presented by their country's creditors (even though those conditions had yet to be formally proposed) in order to, essentially, stay financially afloat for now. While their government is urging them to vote no.

The latest polls suggest that should the Greeks be asked to simply vote yea or nay on remaining in the Euro, 70% would vote yea! However, when asked if staying in the Euro meant adhering to what many view as severe austerity, the yeas fall to 55%-60%.

The problem is that by July 5th, Greece will presumably have missed the June 30 deadline to make a major payment to the IMF. Which essentially brings an abrupt end to the possibility of continuation or expansion of the "European financial arrangements". The immediate-term question is will the European Central Bank continue to provide the daily liquidity necessary to keep Greek banks open for business come Monday? We'll know soon enough. Upon today's news, Greeks stormed ATMs and grabbed all they could till the machines went dry.

Make no mistake folks, there are calculations being made here. While Tsipras and company appear adamant in their opposition to the would-be proposals, I can't help but wonder if they're not privately praying that their people vote yea---for a nay would leave the country in immediate shambles, given all we know at the moment. You see, Tsipras made utterly unkeepable campaign promises to get himself elected. Should he concede to creditor demands, he'd be depicted as a liar and a fool. If he allows the Greek people to concede, and the creditors are willing to reopen negotiations, he's either hoping he can salvage his nascent political career or be able to resign with dignity.

On the other hand, perhaps Tsipras truly wants the nay. In which case he'd be betting that the Eurozone leaders have zero appetite for a Greek exit, and would, therefore, return to the table with far less painful proposals.

As for the IMF and the European finance ministers, from what I glean from the interviews and commentary following Greece turning its back on the process, they're in a bit of a state of shock. Emergency meetings will no doubt take place throughout the remainder of the weekend, as the powers that be consider the various scenarios that may play out over the next few days.

As for the markets, while, according to IMF Managing Director Christine Legarde "the euro area authorities stand ready to do whatever is necessary to ensure financial stability in the euro area", I suspect we'll experience unusual volatility come Monday morning---barring some highly improbable about-face. In terms of their wherewithal to do whatever's necessary, certainly they've had ample to time to prepare. And, yes, since 2011 (a Greek exit would've been a vastly different situation then) they've established a variety of facilities to deal with such an event. Here's Ms. Legarde during an interview this morning with CNBC:
You know, I have been around for a long time during those moments of crisis. And certainly the euro area is in a completely different position from where it was back in 2011. Let alone 2008. Whether it’s the ESM, the ESFS - the tool box available and validated and endorsed by the court… the European Court of Justice in particular… by the ECB… and the tools and defenses that can be put to good use which were not available in 2011. So that issue of contagion has a completely different dimension. As far as the neighboring countries are concerned,  clearly, there has been a debate. There has been precautions taken in vicinity countries.

I'll keep you posted. And keep in mind what I wrote in this weekend's update:
...  if I were an investor, I’d be feeling fine and dandy right about now. For I’d know that in the time horizon for which I’ve committed the equity portion of my portfolio (the rest of my life, or the lives of my heirs, as my case may be), Greece’s present saga will have become all but forgotten, the Fed will have adjusted interest rates many times over, and all manner of event risk will—as it always has—ebb and flow whilst I allow my well-balanced portfolio to ride the inevitable tides. The tides inherent in the ownership of the companies that will stock a desiring world with goods and services in the years to come.

No comments:

Post a Comment