In a Kafkaesque moment which saw the Greek nation being asked to vote on whether their government should accept a proposal that no longer officially exists, it looks like Greece’s fourteen year membership of the Eurozone is about to come to an abrupt and chaotic end. The choice of Greek voters to take the well-worn path of refusal and just say ‘No’ will, according to Tsipras, enable the country to regain its dignity and pride. But it remains to be seen what the true cost of this temper tantrum will be. Prior to today’s result, GDP forecasts for Greece had already seen major downgrades as a consequence of the uncertainty caused by protracted negotiations as well as from the negative impact of the recently-imposed capital controls. But it now looks like that’s just for starters with the main course yet to come.
A stickler when it comes to national pride, we must question whether Tsipras will be content at having elevated his country to the august company of such economic luminaries as Zimbabwe, Somalia, Zambia and Sudan or whether he will aim for the giddy heights claimed by Argentina and Venezuela. A cursory examination of the history of Syriza reveals a worrying mix of Marxist ideologues, activists belonging to the revolutionary left and ‘fellow travellers’ from the international anarchist movement. Whilst easy to dismiss any remainders of these movements as the ‘loony left’ of Tsipras’ party, the hard core 30%, it is unclear to what extent such influences have more subtly informed the party’s current ideology. There is the potential for the situation to unravel in ways undreamt of by a European liberal press that has had the tendency to make Syriza the poster-child of a leftist challenge to the neo-liberalist order that they claim has usurped the European project. Indeed, the consistent failure of much of the international media to get to grips with the reality of the Greek situation both in an economic and a political sense has not only led investors to incorrectly assess risk, but has also arguably aided Tsipras in his endeavours. Whilst it will be a task for historians to decide whether Grexit was Tsipras’ game plan all along, or whether a mixture of incompetence and miscalculation on his part led to him breaking his election promise to the Greek people by putting Greece’s continued Eurozone membership on the line, in my opinion it is the former.
If true, that this most undemocratic scheme was successfully put through by ostensibly democratic means in the birthplace of democracy is, of course, an irony that will be lost on no-one.
Whilst there are some who will no doubt continue to argue that Grexit, default and drachmatisation of the economy is the only way out of the debt trap, the likely collateral damage caused by taking this route undoubtedly appears more palatable from the Ivory tower than it does on the ground. Some estimates call for a further -25% contraction in real GDP in the Grexit scenario, meaning the Greek economy might shrink by a total of -50% in real terms by the time it emerges from the so-called GFC and its aftermath. So much for the financial cost. The risk of political and geo-political upheaval adds a further dimension that is not easily quantifiable, but the threat to both Greece’s democratic system as well as its national security cannot be dismissed out of hand and will bear close observation.
With regard to our theoretical trading perspective, the referendum outcome means that the probability of Grexit is substantially higher than the probability of a last-minute deal somehow being reached between Tsipras and the Eurogroup. This is not to say that discussions regarding such a deal might not take place. Indeed, it is likely that Greece’s creditors may be willing to make some small concessions in a last-ditch attempt to avoid the Grexit scenario. However, these are unlikely to be sufficient to satisfy the newly-emboldened Tsipras. Besides, it is difficult to see how the necessary trust could be re-established between the two parties given the cynical manner in which Tsipras has engaged in the negotiations thus far; Greece’s creditors will rightly ask what faith they can have that he will keep his end of the bargain in any deal that they might conclude. Schäuble’s remarks regarding Greece being “temporarily without” the Euro indicates an increased willingness on the part of Germany to countenance Grexit, suggesting that Tsipras is likely to be given short shrift. Hence, any rally that might be triggered by the resumption of talks should be faded.
Clearly, if, against the odds, a deal is somehow reached, then shorts should be closed. However, the most likely scenario is now that Greece exits monetary union and either immediately adopts the drachma, or issues some form of interim currency pending arrangements being made for full drachmatisation. In this instance, the immediate downside for the Greek equity market – when it reopens – is substantial, and the (theoretical) short trade I suggested in January and have reiterated consistently since then should return around 100% with the Greek banks’ equity buffer blown when the ECB pulls the plug.
Any panic in the periphery should be used as a buying opportunity, with long positions established in Portuguese, Italian and Spanish equities. Such volatility would merely illustrate how, once again, investors price in outcomes on a normal distribution curve, with the crystallisation of tail risk creating havoc. However, the probability of the ECB response being sufficient to contain contagion has not changed in the least. Action is likely to be swift, decisive and overwhelming. This combined with intimations of further, potentially unlimited liquidity should quickly stabilise markets, creating the basis for a strong rally in risk assets.
In spite of its ancient roots, Greece is a young country, having as a result of four centuries of Ottoman rule missed out on the major humanistic movements – the Renaissance, the Enlightenment – that have helped shape modern Europe. Progressive Western ideas have sat uneasily with a hankering to the East and religious observance has fostered a feeling of affinity with Russia. It is for the Greek people to make sense of these conflicting elements in the national psyche once and for all. It might be that Tsipras, ironically, is the catalyst that ultimately brings Greece to an awareness of the position that it wishes to occupy in the developed world. Whatever the likely economic and social destruction wrought by Grexit – if such comes to pass – the Greeks will undoubtedly emerge out the other side stronger and in a position to finally make a positive choice about what sort of direction they wish their country to take. Schäuble’s comments suggest that there would be scope for Greece to re-enter the Euro at a later date, perhaps in some few years’ time, having of necessity and of its own volition delivered the structural reforms that the country so desperately needs.
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