View: Painful bailout terms exceeding Greek tolerances, official lenders need haircut
Doubts about the latest European debt crisis solution were widespread even before Greek PM threw the new deal to the voters to chew over. Recent polls suggest that an outright rejection in a referendum on the plan is by no means a certainty, but with the list of austerity measures seeming to be growing by the day and the economy very much in free fall, by the time the ballot papers are ready to be crossed it, would be surprising if things were not more clear cut.
There is only so much pain voters can take, Greeks have been protesting for many months and the opportunity to express this via the referendum will be compelling. While those supportive of the broader austerity programme might respond to pollsters favourably, whether they will have the inclination to repeat this on voting day is debateable; self-sacrifice is never a big motivator. After two proposed debt restructurings and a (currently) 50% haircut for private investors the Greeks are told that debt levels will be reduced to 120% of GDP, still double the Maastricht limit. Who would vote for that?
Of course a rejection would be equally disastrous for Greece, it would effectively bankrupt the state, ending the flow of support from the EU and other official lenders triggering a disorderly default and ejecting the country from the euro, if not ultimately the eurozone. It’s not clear whether this is just a high stakes gamble from PM Papandreou, trying to force voters to fall into line behind the issue with this nuclear option or perhaps renegotiate the terms recently agreed with other EU17 leaders, or he has just had enough. The fact that a confidence vote was also announced, the government holding a slim 3 seat majority, suggests the latter might be true.
We’d pin the blame for the immediate situation on core European, principally German, preoccupation with austerity over growth. Austerity works well in situations where the fundamental economic story is one of sustainability but the Greeks are horrendously uncompetitive and savage budget cuts have merely pulled the country deeper into the debt trap vortex, underlined by the increase in debt to GDP levels (seen peaking pre-deal at over 180% of GDP in 2013). Plenty has been written about the endemic corruption and tax evasion (for instance there are reportedly more Porsche Cayenne’s on the roads than taxpayers declaring an income of over €50,000) but it’s difficult to change such cultural traits overnight. A carrot and stick approach, focusing on growth and medium-term fiscal health would be far more sensible. Official lenders must also take a haircut.
Market implications are pronounced, it effectively means any perception that the latest package to both bailout Greece and beef up the EFSF was a positive breakthrough will evaporate. The fact that a referendum is unlikely to be held until January also creates a large window of uncertainty, the last thing jittery markets need. Equally important is that this step effectively neuters the other European leaders’ efforts to draw a line under the Greek issue and create that essential firewall to protect Italy and Spain (the Chinese are unlikely to be impressed). It has taken many months of negotiations to get to the current (if somewhat flaky) plan. To expect a viable plan B that could deal effectively with the fallout from a disorderly Greek ejection from the single currency is approaching the world of fairy tales. We doubt that a country, even Greece, leaving the eurozone at all has been seriously debated, yet.
This plays to our ideas of being short the EUR, although it rather derails our bearish bund ideas for the moment, yields gapping down through the 1.96% level we perceived to be the key support level. It should also leave equity markets and other higher beta assets exposed, limiting any positive effects from what should have been some pretty important U.S. data this week. This Greek developments may not in the end prove to be the endgame trigger, it clearly reminds of the plethora of risks within the stumbling eurozone. While stock and bond market volatility makes chasing markets difficult on the back of such news flow, from a medium-term view, we maintain that the EUR itself is overvalued and certainly doesn’t price in the implications of a Greek exit and the knock on effects this could have for the balance of the periphery. We’d keep a close eye on Portugal, which looks to be a few steps behind Greece in this tragedy.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.