Next week is critical for Greece. Mercifully, Spain's travails have taken the spotlight off Athens of late as the prospect of a 'Grexit' just doesn't seem that scary when compared to the idea of unemployment running above 25% in the twelfth largest economy in the world.
Fortunately for the Spanish and unfortunately for the Germans, the ECB has made it clear that it won't let Spain go under even if it means wading into the secondary market with a sack full of euros so fresh the 'speculators' betting against Spanish debt can smell the ink drying on the paper.
No such luck for the Greeks. The Greek parliament is set to vote next week on new austerity measures (Wednesday) and the 2013 budget (Sunday) and if the measures don't pass it might well put the country on the fast track to the drachma. Here is the short version: the Greek parliament needs to pass 13.5 billion in additional spending cuts and tax increases by next week or the next tranche of bailout money will not be delivered and Greece will go bankrupt in November. Last week, Greek Prime Minister Antonis Samaras channeled his inner Hank Paulson and said that should the measures not pass, Greece would descend "into chaos."
While the country's Finance Minister Yannis Stournaras hilariously said last Thursday that he is "not particularly concerned" about the prospect of the package not passing, there are plenty of reasons to believe that the vote might not go as planned. First, two members of the Socialist party (the second of three political parties in Samaras' fragile coalition government) quit last Thursday, in a show of dissatisfaction with what one of the two defectors called the government's "dead end policies". This indicates that the Socialist party may not offer wholesale support of the measures. Furthermore, the Democratic Party of the Left (the third of the three coalition parties) has flat out promised to vote against the package. As Bank of America Merrill Lynch remarked in a note to clients,
Assuming these threats materialize, the government majority drops from 25 to 5 (it was 29 after the last election). This is far from a comfortable margin. A negative vote will be a very negative event for the markets in our view, as Greece is unlikely to receive the next tranche from the Troika and markets could start pricing in a Greek exit.
As I noted in an article published last week, Nomura has estimated that if Greece returns to the drachma the new currency will likely depreciate between 55-60%, one of the worst redenomination events in history.
This is all set against social upheaval of unprecedented proportions in the country. For example, crowds cheered in Athens Friday when investigative journalist Costas Vaxevanis was found not guilty of violating data protection laws. Mr. Vaxevanis published the names of 2,000 Greeks with Swiss bank accounts in his magazine Hot Doc. Vaxevanis obtained the list from a memory stick sent to him -- the data were extracted from the records of the Geneva branch of HSBC.
While this is undoubtedly a victory for freedom of speech and freedom of information, the problem here is that if Greece ends up exiting the Euro and the new currency depreciates by 55-60%, the angry public (who, readers will recall, recently launched Molotov cocktails at police officers) will have a list of names of wealthy Greeks who have euros stored away in Switzerland.
Additionally, Merrill Lynch notes that even if the vote is positive,
...the continuous deterioration of government debt dynamics makes an official sector haircut inevitable in our view. Indeed, we believe that the IMF cannot disburse its part of the next tranche, unless debt sustainability is restored.
Official sector involvement means more writedowns, more losses for eurozone governments, more discontent, and on and on.
Investors should watch the Greek situation closely next week, especially given the fragility exhibited by the market of late. I continue to recommend a negative bias as I have for quite sometime now, and that means staying short broad indices both in the U.S. (SPY) and Europe (FEZ). That position hasn't fared too bad lately with the S&P off over 4% since its intraday highs surrounding September's FOMC meeting.