Greece and the Market - Referendum "NO" is predicted

As I sit with my family enjoying our July 4^th celebration I continue to keep an eye on the news coming out of Europe today. Of course I am referring to the Greek referendum on whether the people of Greece will accept the terms of a bailout. I have not written about the Greek crisis in the past as I feel it has been analyzed up and down and I really don’t have much to add in the debate. What I can say is that I feel the vote this weekend signifies the inability to continue down the path of ambiguity that has plagued this situation for years. The outcome of the crisis as it relates to Greece is important but the precedent that it sets within euroland is of more importance in my opinion.

Time will tell.

Starting with Greece

The folks at Business Insider summed up the situation as it relates to the referendum.  “Greeks who vote "yes" in the referendum will be casting a vote in favor of Greece remaining a part of the 19-member eurozone. The vote is an acceptance of bailout funds in exchange for Greeks agreeing to budget cuts and other austerity measures set forth by Greece’s three creditors—the International Monetary Fund, the European Central Bank and the European Commission. A majority of Greeks voting “yes” would also signal that the country has largely lost faith in Prime Minister Alexi Tsipras and his left-wing Syriza-led government. The outcome could force leaders to resign, which would usher in a new provisional government. Greek Finance Minister Yanis Varoufakis said on Friday that he will resign if Greeks back the bailout.”

The “yes” vote was thought to be the most likely outcome but the early results suggest otherwise. Both the U.S. and surprisingly enough the IMF have come out and are endorsing a debt restructuring proposal that would assist Greece during the continuing negotiations. The risk associated with a yes vote would most likely result in the resignation of Tsipras and usher in a replacement for the current Syriza-led government. The political uncertainty surrounding the change may ultimately increase market volatility and keep it on unsettling footing as the negotiations continue.

According to Business Insider, “A “no” vote on Sunday is a rejection of the austerity demands of Greece’s international creditors. Tsipras tried to reassure Greeks this week that a vote against the bailout would allow him to sit down with the country’s creditors in a stronger negotiating position. The result, he said, would be a new bailout deal with better terms. The “troika” of creditors, however, have said they are unwilling to renegotiate. If that’s true, and “no” voters prevail in the referendum, Greece risks an exit from the Eurozone.”

The “no” vote will give Tsipras national support to go back to the negotiating table with his restructuring plan but that doesn’t guarantee Greece a deal and risks additional economic pain with the possible exit from the euro. This article from Bloomberg describes the difficulty of launching a new currency and why the launch of a new Drachma will be extremely challenging.

The financial and economic profile for Greece remains abysmal, they failed to make their scheduled payment to the IMF, closed their major banking concerns, are limiting cash withdrawals and closed their stock market for a week. This is catastrophic stuff. That said, the global developed markets for the most part have suffered slightly but we haven’t seen a rout of mass panic selling. This crisis has been so long in the making that the markets and financial players have braced and prepared for the worst case scenario in my opinion.

Reading Mauldin Economics this weekend, John Mauldin writes, “The ECB has been gaming Greece for some time. Reports suggest they think they have Greece ring-fenced such that it won’t set off a market contagion. I wrote five years ago that Europe (read Germany) would be willing to let Greece go as soon as European (read German) banks had gotten rid of most of their Greek debt. That Greek debt is now largely on the books of state actors (governments, the IMF, and central banks) who will just absorb the losses and pass them on to their loyal taxpayers.” He continues to write, “I understand that the ECB and the European Commission have to be making contingency plans in case Greece leaves the euro. They need to deal with potential bank runs in other countries, especially the smaller countries near Greece (for countries with potential problems, see the list above of Greek debt holders), and to protect all markets from the negative consequences of a possible Grexit. They would be derelict in their duties if they were not making contingency plans.”

Bottom Line: The situation is important for the future of Greece and more importantly the future of the euro-experiment. That said, if the referendum is a “yes”, there will probably be little reaction in the markets, possibly even a small relief rally as the situation lingers. A “no” vote would have greater implications on the market and increase volatility but it will not be enough to spark the global equity correction that so many are anticipating.

As of the time of this writing, the coverage on euronews states the “no’s” look like they will win. Should be an interesting day in the market tomorrow.

 

Joseph S. Kalinowski, CFA

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