Will It Be A 'Grexit', EUxt Or Just Bust For Greece?

JUN 23, 2015 @ 9:16 PM

Forbes

With Eurozone and Greek finance ministers embroiled in a crisis summit and a ‘final’ showdown yesterday, will this on-going Greek drama ever get resolved? It is amazing that the situation has persisted for so long and I’ve lost count of how many times the markets sold off before a last-minute deal was struck and a sharp rebound ensued.

While many might see these last ditch efforts – despite Greece’s latest offer on Monday constituting “some progress” according to German Chancellor Angela Merkel – is this simply yet another opportunity for more political fudging in an eleventh hour deal? There is growing concern that we now need to start preparing for the worst. This is not that Greece will finally exit out of the Euro, but about more heightened concerns that the Eurozone project could itself fail.

Clearly a lot is at stake and time is very short. Indeed, last week Greek banks saw deposit outflows zoom to over €4bn, which forced the European Central Bank (ECB) to inject a further €1bn in emergency liquidity assistance (ELA) to avert the immediate crisis. That said the markets are getting a bit bored with all the noise and indecision.

Amid all the turmoil I couldn’t help agreeing with Dennis de Jong, managing director at UFX.com, an online Forex broker that specializes in trading currencies, commodities and stocks, when he says: “The on-going Greek back-and-forth with the IMF has become tiresome for the Euro traders, who are beginning to feel that even a Grexit wouldn’t be too damaging for the single-currency.”

He adds: “They’ll be hoping for a resolution either way with the IMF’s debt repayment deadline fast approaching [at the end of June]. But in the meantime, ECB president Mario Draghi will no doubt be disappointed with the weak growth in manufacturing figures out this Tuesday, and especially now as a few months have elapsed since his trillion-euro quantitative easing programme was initiated to fuel inflation.

Although no final deal was struck between Greece and its creditors on Monday in meetings of Eurozone finance ministers and Eurozone leaders, updated proposals tabled by the Greek government were viewed by some as offering a basis for a possible deal. There has been movement by Greek goverment officials and in particular on pensions and VAT reform – and closer to the lenders’ position. The Greek plan would see savings of almost €8bn in 2015 and 2016.

Though there is cautious optimism in some circles, others like Lithuanian President Dalia Grybauskaitė have been less positive. Ahead of the meeting, she tweeted: “The Greek government still wants to party, but the bills have to be paid by somebody else.”

It’s nevertheless all to play for with Eurozone finance ministers convening again this Wednesday (24 June) with the aim of finalizing a deal for the European Council summit on Thursday and Friday.

Pieter Cleppe, head of the Brussels office of policy think tank Open Europe, speaking on BBC Radio 4’s Today programme, said: “Transfers and intervention into domestic economic policy have certainly failed for Greece over the past five years, and yet Eurozone leaders want more of the same.”

Despite the uncertainty over a deal still hanging heavy, early this Tuesday the German DAX-30 and the French CAC-40 blue-chip indices both moved higher in morning trade in Europe – the former by around 1% and the latter by some 0.84%. In Japan, the Nikkei 225 index reached a 15-year high (closing at 20,809.42) on a possible Greek deal and the index is now around 25 points away from reaching an 18-year high. On the currency markets, Sterling was close to a 7-year high against the euro at £1:€1.41.

Tom Elliott, International Investment Strategist at deVere Group, one of the world’s largest independent financial advisory organisations, says “It is becoming increasingly clear that the Greek saga is coming to a head. The Greek government knows it. The IMF knows it. And, the Eurogroup knows it.”

He adds: “We’re moving into unchartered waters. We’re [potentially] about to witness the fragmentation of the single currency and witness the return of the drachma. How are Eurozone capital markets likely to immediately respond? In the words of T.S. Eliot: ‘Not with a bang but with a whimper.’” Whilst the market response is likely to be muted in the immediate aftermath of a ‘Grexit’, Elliott says “greater market volatility” should be expected moving forward.

With only 18% of the outstanding Greek government bond market in private hands, a Greek default would according to Elliott “not cause havoc with non-Greek banks, who have largely washed their hands of the stuff.” Interestingly, Greece could decide to honour its privately-held debt, but not the 72% held by IMF, ECB, Eurozone governments and other creditors. So, that might throw up a few issues in terms of treating different investors in the same bonds.

Over in The Netherlands, Valentijn van Nieuwenhuijzen, head of strategy, multi-asset at NN Investment Partners (formerly ING Investment Management) sees that while signs of contagion of the Greek drama to other parts of financial markets have only very recently started to emerge, the “worst possible outcome for Greece would still be significantly smaller” in terms of global impact than it would have been during most of the past five years.

He adds: “Still it would be very disruptive and trigger turmoil in financial markets for at least a couple of weeks.” So, while still looking for new opportunities to add risk on the back of on-going faith in the resilience of underlying fundamentals globally, “the edge of chaos on which Greece is now balancing weighs on our risk appetite in the near-term”.

The Dutchman says further: “The underlying trend in timely and reliable indicators of the global business cycle still point towards further strengthening. Moreover, the less volatile and more domestically oriented parts of the global economy like labor markets and service sectors have remained much more resilient in most parts of the world.”

The big strategy of the Brussels group (formerly known as the Troika) behind all this [the negotiations] is to break the political will of the Greek side he contends. This is likely to cause further increased political uncertainty in Greece, but says van Nieuwenhuijzen it “will also serve to reduce future political uncertainty in the rest of the region.”

Rebecca Healey, TABB Group’s consulting analyst in London who formerly worked at Credit Suisse and Goldman Sachs, and who has been following the Greek situation for several years says: “We are now looking at the third debt repayment extension [for Greece] in six months to prevent Athens defaulting on their €1.5bn IMF loan by June 30, to say nothing of the further €6bn due in July and August.” That said, the Greek government is averse to a third bailout.

Yanis Varoufakis, Greek Finance Minister, writing on 18 June 2015 in a post titled ‘Greece’s Proposals to End the Crisis: My intervention at today’s Eurogroup’, summed things up in a nutshell: “At this, the 11th hour, stage of the negotiations, before uncontrollable events take over, we have a moral duty, let alone a political and an economic one, to overcome this impasse. This is no time for recriminations and accusations. European citizens will hold collectively responsible all those of us who failed to strike a viable solution.”

Whatever the outcome later this week, Healey contends that the Eurozone as it stands is unsustainable. She adds: “The macro imbalance has been the hallmark of the Eurozone crisis and current account surpluses of Germany and the Netherlands are heading towards a surplus of 10%. Either the leaders have the courage to learn from their mistakes and change course, or they do not.”

Europeans might do well to take heed of Varoufakis’ words of warning. Eurozone leaders may attempt to paper over the cracks yet again, but without a longer-term strategy in place that is an option that will eventually disappear. And, as TABB’s Healey argues: “If Greece crashes out of the Euro, old divisions may well reignite, right versus left – and not just in Greece.” We await the outcome.