I wrote recently regarding the binary nature of the Greek situation. That opinion has not changed. In that article I was not sure which way the result would go, but suggested that if forced I would think that a deal would get done and the can would be kicked further down the road. I suggest this as Greece will undoubtedly default on enough debt to get its debt to GDP back to 50% or below. It is just a question of the timing and the nature of the default (either managed or chaotic). The odds looked in favor of a partial managed default now and several more episodes of default until the 50% mark (sustainable rate) is achieved.
As a separate point, it is clear that the same situation is apparent in Portugal, and Ireland. Both are going to default on the percentage of their debt that gets them back to a sustainable position. It will be the same outcome, only the timing and the nature of the defaults are in doubt.
I also alluded to a scenario where the poker game that Germany (and the hard currency countries) and Greece are engaged in, might go right to the edge. In this scenario the deal falls apart and Greece starts down the chaotic default route. At this stage one or both of the sides backs off and a deal gets done at the last minute. All sides would have an excuse for their electorates in these circumstances (we avoided disaster) and a deal gets done. This would also send a warning shot across the bows of Ireland and Portugal.
So you ask, why am I revisiting old news?
Germany has just sent Greece packing with the reason given that the austerity needs increasing by €320 million and the agreement needs ratifying by each party in the Parliament so that Greece will now be forced into making the changes after the next election (nice try by the Germans, but unlikely to work). This is a red flag to a bull signal; a good slap across the face for the Greeks. Just try to imagine that you produced an offer that has taken several days of negotiation with your coalition partners and this is promptly given back without serious consideration. I am sure that the Greek politicians are severely bruised this morning (and very annoyed). If they are already considering a chaotic default this may just be the tipping point. It certainly gives the politicians a good reason to go against their populace's view that they should remain in the euro.
I also wonder after this move whether the Germans (and the Dutch, Finns and Austrians) have genuinely had enough and are just goading the Greeks into an exit.
I would have to suggest after this latest move by the Germans that I have no idea if a deal gets done or not. Odds are back to 50-50. Fortunately we will not have to wait very long. The Greeks are due to vote on the changes on Sunday. Hopefully this will produce a definitive answer and will not be another Greek half way house that will get rebuffed by the Germans.
Investment implications - Short term
I am reasonably certain that a chaotic Greek default is not priced into this market. I would urge all investors to consider the headline risk. My previous article gave my thoughts on the potential outcomes for the market under the two scenarios. I would have to say that I have been itching to add some shorts, but have shown discipline and done nothing. I may well miss an opportunity, but this is still a binary outcome and if I am on the wrong side of the headlines I will lose money (as the market will rebound). I would suggest that all investors hold off (both buying or selling) until the vote is known on Sunday. You will miss the best entry or exit levels, but at least you should know that you are positioned on the right side of the market.
Investment implications - Longer term
This market is very overbought. If there were to be a disorderly default it will have a decent fall. This will likely have an effect on any nascent recovery in market data, which is one of the other props under this market. The recession word would likely start to reappear in market commentary. It is possible that this happens anyway, but the Greek default would make it a high probability event. In these circumstances market volatility will return.
If the Greeks agree to the latest demands, there will be no effect in the longer term.
Disclosure: Long RWM
Disclaimer - This article is not intended as investment advice. Before taking any action, please do your own research. Do not rely on any opinions or facts included in this article for decision making.
