The Greek people went to the polls last Sunday, and the winner was the pro-Euro New Democracy party—beating out such political foes as the radical, anti-bailout Syriza party-- which campaigned on a platform of rejecting Europe's austerity-led conditions for bailout assistance-- and the pro-bailout, Socialist PASOK party. At first glance, this seemed like good news for Greece and Europe overall, since an unprecedented exit by Greece from the Euro could have led to further turmoil in the European credit markets over fears that other countries (Ex. Spain and Italy) might follow suit. As a result, most markets gained overseas initially, but later cooled once U.S. markets opened and investors had more time to digest the likely short term impact of the election results.
We believe that some significant questions remain in the eurozone and would prefer to see Greece start the process of their exit from the Euro sooner than later since we view this outcome, along with an eventual default on some of their outstanding debt, as increasingly likely based on current economic conditions in this particular P.I.I.G.S. (i.e. Portugal, Italy, Ireland, Greece and Spain) country. Many analysts believe the winning party will now be able to form a coalition government and negotiate some of the more severe austerity measures that have been recommended, while remaining within the larger fiscal safety net of the Euro. However, we consider it inevitable that the current Euro currency / eurozone arrangement cannot last without some significant structural changes within the European Union as well as a real commitment from their more abusive debt to Gross Domestic Product (GDP) members to mend their high spending / low spending ways. This will prove to be very difficult to achieve given the low growth / recessionary environment that currently exists across Europe.
While we are concerned with the longer term viability of the eurozone and the Euro currency, in the more immediate term, we remain convinced that Greece, which currently has; a) an unhealthy 165% debt to GDP ratio, b) 41 billion Euros in unpaid government tax revenue, c) a 52.7% youth jobless rate, d) more than 50 years in default or restructuring since 1829 and e) represents only 0.4% of the combined Euro-area GDP according to a June 18 Bloombergbriefs.com article entitled "Greek Crisis Monitor", will still eventually decide to exit or get pushed out of the Euro currency. To this end, Briefing.com pointed out on June 18 that Greece's economy has declined by about 15% over the past 4 years, with a 22% unemployment rate, and bank deposits have been raided, and perhaps even more concerning, stated that, "…a country cannot (realistically) pay pensions of 80% to retirees at 58 when fertility rates are just 1.52. Birth rates have been below replacement level (2.1) for three decades. The actuarial math is undeniable – it implies fiscal calamity."
As a result, we can't help but contend that despite the election results, Greece was a mess before the weekend, is still a mess today, and will likely still be a mess tomorrow and beyond. Expect to see Greece and Europe continuing to dominate the market headlines throughout the summer.
Disclosure: No positions