Europe

Last Minute Change of Heart, Miss Drachma Left Standing at the Altar: Grexit Rejected

By all accounts, the Greek government’s flirtation with Grexit almost ended in a shotgun wedding in the early hours of Monday morning. With the pastor summoned and en-route, Schäuble beaming at the prospect of the forthcoming nuptials, Tsipras had a change of heart, left Miss Drachma standing at the altar and conceded to the majority of the creditors’ demands. In so doing he put country above party, made a final break with the castles in the air spun by the ‘Sage of Aegina’, and honoured his promise to the electorate to keep Greece in the Eurozone. That the negotiating strategy he and his former Finance Minister had employed over the preceding five months had brought Greece to the point where it had no option but to acquiescence to the terms demanded lest it was summarily ejected from the Euro is now neither here nor there: the deadlock has been broken and a path to continued Eurozone membership has opened up. True, it won’t be easy, but to quote various members of the Eurogroup: where there is a will, there is a way.

Whilst the proposed terms are being portrayed in some quarters as a draconian imposition on Greece’s sovereignty, the fact of the matter is that the Greek economy was broken years before the recent shuttering of the banks, long even before the austerity measures that were part of the previous bailouts were implemented. The country is in the grip of oligopolies every bit as insidious – though perhaps less overt – as their Russian counterparts. Corruption has thoroughly permeated every stratum of the public sector and clientelism runs unchecked. The price, of course, is paid by the ordinary Greek in the form of the ‘mark-up’ which is the excess super-normal return secured by the oligarchs in return for the proverbial brown paper envelope, no little thanks to which hard-working officials were able to afford some of life’s simple pleasures – a new swimming pool, say, or perhaps a small place by the seaside. That the agreement which Tsipras has to sign up to focuses so heavily on opening up markets and reforming the structures that perpetuate such ‘inefficiencies’ is thus unequivocally positive. This important point has tended to be overlooked in much of the media commentary, which has more often than not sought to make Greece the champion of a neo-Keynsian challenge to the austerity that, as per the trope, has been misguidedly inflicted on a long-suffering Eurozone by its German paymasters.

Let’s make no mistake: this is going to be a difficult period for Tsipras. In the likely face of stern opposition from his own party, he has to rush legislation through the Greek parliament in the next 48 hours – the ‘prior actions’ insisted on by Greece’s creditors. In so doing, he will almost certainly lose his parliamentary majority, paving the way for a general election perhaps at some point in the autumn. Tsipras may even decide to step down after Wednesday’s vote, ceding power to a national unity government with a technocratic mandate, which would probably prove deeply unpopular with an electorate already ablaze with talk of a ‘coup’ having been perpetrated on Greece. Even if Tsipras manages to brazen it out, there is a high possibility that say, come October, he will have to face former colleagues at the ballot box if Syriza’s left wing breaks away and forms a new party that would likely campaign on an anti-austerity, anti-Euro manifesto. Furthermore – assuming the vote passes – as steps are taken to formally enter into the third bailout, the outbreak of civil unrest is likely: of the 61% that voted No in the referendum, a significant proportion will undoubtedly feel that Tsipras has betrayed their trust. On top of this, the continued involvement of the IMF and the periodic review of progress on reforms by the creditor institutions is bound to create extra tension. And Tsipras must stand up to claims that by signing up to the proposed deal he has betrayed his key election promise to end austerity. So there is a lot of scope for so-called ‘implementation errors’.

However, the main question we need to answer at this moment is whether Tsipras can get the necessary legislation passed by Wednesday to ensure that Greece remains in the running for a third bailout. Even if this results in the loss of further party support, simple arithmetic suggests that he can. Just. This removes the immediate downside risk. After this point, if he decides to stay, Tsipras’ strategy must be to focus on the ‘enemies within’, diverting the attention of the electorate from the continued austerity which is the price of the third bail-out. In this endeavour Tsipras is fortunate that by getting to grips with the structural reforms demanded by Greece’s creditors, he stands to gain considerable political capital: cracking down on tax evasion and corruption will doubtless prove to be a popular move and dismantling oligopolies will result in lower prices for consumers. This should help him weather the inevitable political storm. To paraphrase Verhofstadt, Tsipras has the opportunity to go down in history as a real revolutionary who modernised his country. This explains how he might well be able to bring himself to take ownership of a project that is seemingly the antithesis of the Syriza ideology. And his ability to put country over party, as he unequivocally demonstrated this weekend, indicates that he just might have the leadership skills necessary to stay the course and face down the threats that will undoubtedly be brought by those radical elements that have been agitating for a return to the drachma and the chance to make Greece a laboratory where Marxist theory could be put into practice. It is to his credit that Tsipras ultimately rejected those voices within Syriza pushing him to embark on that particular experiment, one that has already been shown to fail wherever it has been implemented.

Ironically, the best chance for Greece to enact the stipulations of the third bail-out and remain within the Eurozone may well be with Tsipras at the helm. The political mood of the populace suggests that a technocratic government will be given short shrift, may indeed pave the way for a radical party winning in some future election on an anti-Euro mandate, bringing back the spectre of Grexit.

In spite of the potential for volatility caused by domestic politics, the tail-end risk that I very much feared would come to pass appears to have been significantly reduced (or at least postponed for the short term) by this latest development. Consequently, our theoretical trading strategy now calls for closing shorts on the Greek market (when it becomes possible to do so). As an aside, I would make the observation that valuing the domestic banks has been complicated by recent events: media reports suggest that the deposit outflows ahead of the bank holiday have seriously undermined the viability of some of the banks. I would also argue that the legislation that is to be introduced as part of the agreement with the aim of allowing the current high level of NPLs to be reduced, whilst positive for the long term health of the banking sector, will likely necessitate further equity issuance down the line. Long positions should now be instituted/increased in periphery equities (ex Greece), with bouts of Greece-related volatility used as buying opportunities.

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