Greece and Global Markets
This weekend, the roller coaster negotiations between the Greek government and its official lenders broke off as the Greek government called a referendum for July 5. The referendum is effectively a vote on whether Greece should accept additional austerity or not and remain in the euro. Over the past 24 hours, a host of varying views have been written and outlined on the subject by financial journalists, the media, and political and economic commentators. This is a quick update to outline our perspective and reaction to the recent events.
First and foremost, the weekend’s “no deal and call a referendum” outcome is not a surprise to us and something we in fact expected would on balance occur. The Syriza government is strongly ideological and quite left leaning in their economic views, and it was increasingly apparent through recent weeks that they were seriously at odds with the broad European consensus and way of doing things. While many politicians are pragmatic and flexible, Syriza are not and this has proven to be the case here. They have seemingly failed to find any common ground or cause with the broad European political leadership. So five months of failing to agree at a political level is now effectively in the hands of the Greek people to decide in five days, via a referendum!
The referendum itself, while extremely technical in its wording, will in our view simply be seen as a vote by the Greek people as to whether they wish to be part of the euro or not. We are not getting into the various technical questions being put out today such as, Would a non-payment to the International Monetary Fund tomorrow be a default? (the answer: it is not). Early polls are encouraging and suggest a majority of support for the referendum, which would be against the Syriza government.
From an Irish perspective, it is worth recalling that a loose (but arguably still relevant) precedent occurred with the Irish referendum on the fiscal treaty in 2012. In that case Ireland had:
- A disgruntled electorate being asked to vote for more austerity or face great(er) uncertainty.
- A very strong anti-EU (euro) lobby arguing that a “no” vote was both tactically and morally correct.
In the run-up to that poll, there was a genuine fear in Ireland (and across Europe) of a “no” victory, but in the end the electorate voted resoundingly for the lesser evil.Ireland passed the fiscal treaty referendum by 60.3% to 39.7%.
Our core expectation is that the Greek people will vote “yes,” in a way similar to Ireland. This will pose a major question as to the sustainability or future of the Syriza government itself with different outcomes possible:
- The most likely would be that Syriza resign and either a new election occurs or a National Government is formed and installed without an election. A more harmonious relationship with Europe would follow.
- If Syriza accepts the will of the people and goes back to the negotiating table, this could be very tricky and the least preferred outcome for the markets.
Consistent with this expectation, we put a 70% probability on Greece remaining a core member of the euro. It will not be a straight line resolution and the roller coaster will remain as they work toward an eventual deal agreement for Greece. However, it would not be an event that would cause serious casualty in the markets.
What are the risks?
- The Greek people vote with Syriza, and there is a “no” vote next Sunday. If this occurs, then GREXIT becomes a more serious likelihood.
- A run on the banks across Europe similar to what we see in Greece today.
- Contagion spreads across the rest of Europe caused by uncertainty in the coming days and weeks.
While eurozone contagion is a risk, we would point out:
- The ECB remains a very powerful force underpinning Europe’s financial system (including an ELA assistance extension to Greece) while its QE program is a very powerful weapon.
- The eurozone economy itself is much stronger today than five years ago and in a better position to withstand many more shocks. This is also the case for the peripheral economies.
- Similarly, the eurozone banking system is in a stronger position today to withstand shocks and stresses.
- It must always be remembered that the European union is first and foremost a political rather than an economic union and that brings with it an enormous resolve to preserve the union at times of severe crisis, should they occur.
The Greek situation remains fluid and volatile, and we will naturally be monitoring it over the coming days. A key for us to watch will be the various polls of voter intentions that no doubt emerge. In the meantime, it is worth noting that KBI portfolios hold no direct Greek assets.
Chief Investment Officer
29 June 2015
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