put it in the books–agreement on a third Greek bailout

Kirk Nieuwenhuis, a fine defensive outfielder who had been batting .097, hit home runs in each of his first three at-bats at Citi Field yesterday.  He became the first Met ever to hit three HRs in a single home game.

Shortly thereafter, Greece accomplished a similar reversal of form.  It agreed to a (third) sovereign debt bailout from the EU/IMF–under terms that were far more rigorous than those it had rejected in a voter referendum a week ago.

That referendum appears to have convinced the EU that Greece would never abide by the bailout terms it had previously proposed.  So, despite pleas for a softer line from France and Italy (both presumably thinking of their own structural problems), the EU opted for tougher terms and a stark choice:  either immediately pass laws breaking down anti-competitive barriers and nullifying ones enshrining vested interests; or leave the EU for five years, with reconsideration of membership at the end of that time.  The unwritten subtext–left to its own devices Greece would go from bad to worse and never qualify for reentry.

The ruling left-far left coalition in Greece has dissolved and been replaced by a left-center one whose primary goal is to retain EU membership.  The legislative changes demanded by the EU are apparently going to be passed this week.  The domestic political strategy will likely be to blame the “evil” EU for changes in the status quo.  Whether Prime Minister Tsipras, who will be the public face of capitulation, survives in office is an open question.  Nevertheless, the outcome is much more favorable for the EU, and  ultimately for Greece, than anyone would have imagined when negotiations started.

three weird things that happened this week

1.  Greece  After months of vitriolic negotiations and after calling a referendum in which it successfully campaigned to have Greece vote against accepting a financial bailout from the EU/IMF, the Greek government appears today to have accepted that bailout.

2.  Chinese stocks  After plunging for a month, Chinese stocks have risen by 10% over the past two trading days.  The world is breathing a sigh of relief.  I’m not sure what’s weirder–that this happened or that foreigners believed for a short while that in a country where doing anti-social stuff can get you either a long prison term or beheading, rather than the cover of Forbes, China would be unable to achieve this outcome.  Actually, the foreign belief is way weirder.

3.  Microsoft/Nokia  Less than fifteen months after acquiring the cellphones business of Nokia, MSFT has discovered that what it bought for over $7 billion (led by mastermind Steve Ballmer) is essentially worthless and is writing off virtually the entire purchase price.  The stock went up on the news.

Which is weirder:  that the MSFT board that rubber-stamped this disaster is still intact?  …or that people are still buying Clippers season tickets?   I suppose you could argue that Nokia was the price for getting rid of Ballmer, which would imply that the behavior of Clippers fans is weirder.

negotiating: Casio, China and Greece

requesting an investment banking client meeting

Years ago, so long ago in fact that Tokyo was by a wide measure the largest stock market in the world, I received a call from a broker asking whether I wanted to meet with the top management of electronics maker Casio in my office in Manhattan the next day.

I knew the company a bit.  I’d visited it in Japan.  It wasn’t a particularly well-run firm.  And it was an exporter, a weak yen beneficiary, at a time when the yen was soaring and only domestic-oriented companies went up.  So I had little interest.

But I said yes anyway.

The broker was in a bind.  He was supposed to be showing Casio the power of his firm’s client list in New York and some manager had cancelled at the last minute, creating a potential loss of face for both the broker and Casio.  I had only a small pool of money under management and my acceptance would obligate the broker to provide me a return service that my commission volume alone couldn’t buy.

Apparently, the CEO of Casio felt under the same sort of obligation.  The meeting was interesting and informative, although it gave me no reason to want to buy the stock.

negotiations with China

The main topic was the company’s negotiations at that time to increase manufacturing capacity in China.

Casio met with Chinese government officials over several sessions and came to a preliminary agreement.  When the two sides met again, ostensibly to cross the ts and dot the is, the Chinese side reopened the negotiations, demanding substantial new concessions.   What Casio expected to be the end point turned out to be the new starting point for further haggling.  It went along because it figured the costs of starting again elsewhere from scratch were too high.

This happened several more times.

Then a contract signing was scheduled.  At that meeting, the Chinese side accused Casio of complicity in the rape of Nanking and demanded still more concessions as a form of reparation.  Casio did so, even though the last contract changes removed all chance of profit from the new plant.

With some distance, the CEO’s main conclusion from this experience was that the long-term relationship of mutual respect and trust that he hoped to find in China was simply not there.  He’d already decided to cut his losses and do no more expansion in China.

Greece today

I was already quite familiar with this negotiating style, which might be described as death (of the other guy) by a thousand cuts.  I’d seen a former boss to the same thing to Lehman.  In that case, however, Lehman eventually picked up and left in disgust.

In its negotiations with the rest of the EU, Greece has been following the same playbook Casio described to me decades ago, down to the accusation of wartime atrocities.  The main casualty in this approach is the loss of trust between the parties, once the Casio-side party realizes the other has no interest in a solution that brings mutual benefit.

It seems clear to me that we’ve passed that point in the Greece-EU discussions.  We’ll find out over the weekend whether this precludes any agreement from being reached.

 

 

 

Greece votes No

Yesterday, Greek voters backed its national administration’s position of rejecting the latest EU bailout conditions in a resounding vote.  60+% of total ballots were “No,” with the nays being a majority in all regions of the country.

S&P futures fell to about -24 when the official voting results were announced shortly before 11pm eastern time last night.  As I’m writing this just before 8am, futures are off by -14; European stock markets are trading lower, but not by much, as is the euro.

Not the best, but not bad, either.

I think what Mr. Tsipras has demonstrated with this vote is that Greece simply will not accept the bailout terms on offer from the ECB/IMF.  Yes, the two sides might sign an agreement, but any Athens government that attempted to implement it would be tossed out of office and replaced by one that would not.

In many ways–and, in particular, from an investment perspective–this simplifies the situation a lot.

 

As I see it, the ball is now in the EU’s court.  It can either make enough further concessions to make a bailout deal palatable to Greek voters   …or it can walk away from the negotiating table, thereby forcing Greece to exit the euro.  The first course presents significant political risks to Brussels and Berlin.  In fact, the Tsipras negotiating style has both brought the idea of further concessions to the point of being at least thinkable and simultaneously made making them much more politically incendiary.  For German voters still paying extra taxes to rebuild the former East Germany, having Ms. Merkel so publicly bested by Mr. Tsipras’ could easily end the political careers of her and her supporters..  I can’t imagine politicians in Ireland, Spain or Portugal who accepted EU austerity regimens faring any better.

We may know which way the EU and IMF have decided very quickly.

Greek banks are supposed to reopen tomorrow, after being shut for a week.  They likely don’t have enough cash, without ECB support, to meet massive demands for withdrawal of deposits that will most likely ensue if those funds haven’t been transmuted into drachma overnight.

 

As an investor, I think Greece leaving the euro today would be the optimal outcome.  This is pure pragmatics.  That way, the Greek crisis would at least be over–for countries other than Greece.  Markets would decline somewhat, sectors would readjust to the new reality  …and then the mind of he market would be on to the next thing.

My guess is that Greece exiting the euro but remaining in the EU will actually be the final outcome.  I also suspect that the process will take longer than just to tomorrow, but that the bulk of the market reaction to whatever happens will take place over the next few days.  The creditors acceding in more than the most superficial way to demands for better terms is the biggest surprise–meaning, least likely outcome–I can think of.

 

What am I doing in my portfolio?

I’m keeping a much closer eye on China (more tomorrow).

I’m watching US trading carefully today.  I’m looking looking for stocks to buy whose prices may be depressed by worries about Greece.  If futures are any indication, I won’t have much luck.

 

 

Greece in a nutshell

Greece joined the euro in 2001.  This gave it the right to print/mint euro currency, as well as to issue Greek sovereign debt in euros.  The second is important because issuing euro debt is like having access to a giant EU credit card–payment was at least implicitly guaranteed by every member of the EU, not just Greece.

Greece probably didn’t meet the criteria of economic health necessary to qualify to join the euro. Everyone in the EU seems to have known this at the time but thought that having the cradle of Western intellectual and political history in the euro was symbolically important.

In 2009, the ruling party lost an election.  The new administration discovered, and announced to the world, that Greece had been systematically falsifying its national accounts–official reports of the country’s fiscal health and growth–for years.  Greece’s apparent prosperity during the opening years of the 21st century turned out to be a combination of lies and living beyond its means, funded by large-scale euro bond issuance.  Most observers agree that Greece run up more debt that it can ever possibly repay.

Negotiations between Greece and its creditors are at an impasse.  Broadly speaking, the EU and IMF want to see structural economic reforms (which may prevent a repeat of the country’s woes) in Greece before any debt forgiveness.  Greece, whose current government has already reversed some of the few reforms implemented over the past six years, wants debt forgiveness first, talks about structural reform later.

The EU put a take-it-or-leave-it offer on the table about a week ago.  The Greek government has decided to call for a national referendum vote on the issue, scheduled for Sunday.  In the meantime, it has shut down its banks, so no one can take their money out of the country.

There are some odd technical issues with the referendum.  For example, one political party is suing to stop the vote, saying it’s unconstitutional.  It’s also coming at the start of vacation season, so it’s not clear whether people can get home to vote, especially with atm withdrawals limited to €60 a day.

Domestic Greek polls indicate that likely voters favor accepting an EU bailout plan by 52/48–even though the administration is campaigning against it.  A “No” vote probably means Greece leaves the euro, and maybe the EU as well.

I have mixed feelings about the negotiations themselves.  On one hand, I’ve got to admire the ingenuity and determination of the Greek side in trying to get the best possible deal.  On the other, everything I’ve I’ve read and heard to make me think Greece regards negotiation as a blood sport.  The point is not to get a fair deal, but to suck the other side dry and toss the husk to the side of the road.  –even a little bit–about the needs of the other side.  It’s turned the negotiations into a fool me once, fool me twice situation, in my view.

I think the current Greek administration may have done a huge amount of damage to the country’s long-term economic prospects by trying so hard.to wriggle out from responsibility for the current crisis.

Ironically, the better outcome for the EU might be for Greece to vote to leave the euro.  The resulting damage to the Greek economy will be enormous, I think.  Seeing what happens will likely silence separatist movements elsewhere in the EU.