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.