Greece - what do we think
Greece is due to repay close to €1.5 billion to the
International Monetary Fund (IMF) by this evening. In the meantime, the Greeks
are lobbying the troika (the trio that comprises the IMF, the European Central Bank
and the European Commission) to release further funds to assist with a pretty
heavy repayment schedule in the next few months. The troika are still
withholding around €7 billion pending negotiations.
Now, while previous Greek governments were willing to accept the harsh terms that accompanied each new tranche of bailout money, the current incumbents were handed a mandate by the Greek people to limit, as far as possible, the worst effects of austerity. In response, Alexis Tsipras, the Greek Prime Minister, has drawn a line in the sand at proposals to further increase VAT and to further cut pension payments. That red line has had the effect of collapsing the most recent set of negotiations.
Further, more senior talks – this time directly involving Germany’s Angela Merkel and France’s Francois Hollande – were held by telephone over the weekend and Monday (22nd June) will be witness to another emergency summit.
In spite of all of the excitement, the Investment Association’s Europe ex UK sector average is down just 6.5% from its April peak and remains 2.5% higher than it was a year ago.
Our best guess
The Greeks are likely to default in some form. But not before a snap election or referendum which puts the question of euro-membership directly to the people of Greece. Syriza won power with a dual mandate; stay in the euro on the one hand and relax austerity on the other. If the two cannot be achieved together, the government will seek to amend its mandate through the polls. There are also some important geopolitical considerations. According to Stratfor, the last few days have seen…
Russia and Greece… [sign] a cooperation agreement on continuing the Turkish Stream natural gas pipeline project…. Russian Energy Minister Alexander Novak said that Russia will give Greece a loan to construct Greece's portion of the Turkish Stream project. According to Greek Energy Minister Panagiotis Lafazanis the 2 billion euro project ($2.3 billion) will be half funded by a subsidiary of Russia's VEB bank and half by a Greek company.’ Greece and Russia do share certain cultural ties, but increased Greco-Russian cooperation will not be warmly welcomed by Britain and the US at this particular moment in time. Those two countries – and the security they provide – will have some influence in Paris and Berlin. That is why I think a muddled agreement – with give and take on both sides – will be forthcoming this week.
But in the longer run, the Greeks cannot go on as they are. There may come a time when the prospect of short sharp pain – in the form of very high inflation and the mother of recessions – associated with a euro exit will be preferred over the long drawn-out agony of austerity. But that is just a guess.
The worst case scenario
It’s probably worth speculating on what might be the worst case scenario. Beginning with a failure to repay the IMF this evening we might then see the Greeks…
· fail to negotiate terms with other creditors, then
· lose support from the European Central Bank, which inspires a
· a run on its commercial banks, which
· forces the imposition of capital controls
That cascading set of events might force the Greeks to issue some form of new currency or quasi currency (tradable IOUs perhaps) which would be the prelude to an expulsion from the monetary union.
Actually, there is an outside chance that an agreement is reached this week but the Greek parliament fails to ratify the terms of the agreement… leading to an accidental exit (a ‘Graccident’). That might not be the end of it though. A Greek exit could conceivably inspire a run on banks in Portugal, Spain and maybe even Italy. And so it goes on.
Of course, none of that will happen overnight.
Implications for the stock market
We are in accord with JP Morgan’s Stephanie Flanders on this one…
‘The key takeaway for investors is that the Greek crisis does not pose an existential threat to either the euro system or to Europe’s financial system. Ultimately we do not believe that Greece alone will be enough to put the European recovery into reverse, or that it will prevent a gradual improvement in European corporate earnings. But there is still plenty of scope for nasty surprises and renewed volatility if the Greek situation continues to deteriorate.’ (Source: JPM Market Insights, 19 June 2015).
Back in 2011, when the euro crisis was as its peak, a Greek default would have been a catastrophe for the euro-zone. It would have spelt disaster for Europe’s banking system and various stock markets around the world would have plummeted. The same is probably not true today; a Greek default would not be a disaster either for the EU, the Eurozone or the stock market (in the long-run at least).
Of course, there is a great deal of complacency. Far too many managers and commentators are dismissive of a potential default; its eventuality would come as a shock to some and the stock market would react sharply while that complacency is washed away.
But does a Greek exit fundamentally alter the long-term potential for listed companies on the continent? How would such a happenstance irreversibly damage the likes of Daimler, Siemens, Louis Vuitton, Total, Airbus, Unilever or Heineken? In terms of the impact on markets we expect there to be short term volatility but this is all. Putting things in context Greece in GDP terms makes up just 1.8% of Europe.
In conclusion
Investors should hold risky assets only in the proportions that they are willing and able to hold for the duration of a significant downturn. This is why we spend time assessing clients attitudes to investment risk and explaining not just the returns but the risk as measured by volatility.
There is one thing that destroys wealth much more effectively than choosing the wrong fund here or there; carrying too much risk and selling out at the first sign of trouble – effectively ‘buying high and selling low’.
The above article is our opinion and is provided for information only purposes. Should you require bespoke, individual investment advice please get in touch.
This article is not intended to be acted on as individual advice and you should consult us before making any decisions.
Now, while previous Greek governments were willing to accept the harsh terms that accompanied each new tranche of bailout money, the current incumbents were handed a mandate by the Greek people to limit, as far as possible, the worst effects of austerity. In response, Alexis Tsipras, the Greek Prime Minister, has drawn a line in the sand at proposals to further increase VAT and to further cut pension payments. That red line has had the effect of collapsing the most recent set of negotiations.
Further, more senior talks – this time directly involving Germany’s Angela Merkel and France’s Francois Hollande – were held by telephone over the weekend and Monday (22nd June) will be witness to another emergency summit.
In spite of all of the excitement, the Investment Association’s Europe ex UK sector average is down just 6.5% from its April peak and remains 2.5% higher than it was a year ago.
Our best guess
The Greeks are likely to default in some form. But not before a snap election or referendum which puts the question of euro-membership directly to the people of Greece. Syriza won power with a dual mandate; stay in the euro on the one hand and relax austerity on the other. If the two cannot be achieved together, the government will seek to amend its mandate through the polls. There are also some important geopolitical considerations. According to Stratfor, the last few days have seen…
Russia and Greece… [sign] a cooperation agreement on continuing the Turkish Stream natural gas pipeline project…. Russian Energy Minister Alexander Novak said that Russia will give Greece a loan to construct Greece's portion of the Turkish Stream project. According to Greek Energy Minister Panagiotis Lafazanis the 2 billion euro project ($2.3 billion) will be half funded by a subsidiary of Russia's VEB bank and half by a Greek company.’ Greece and Russia do share certain cultural ties, but increased Greco-Russian cooperation will not be warmly welcomed by Britain and the US at this particular moment in time. Those two countries – and the security they provide – will have some influence in Paris and Berlin. That is why I think a muddled agreement – with give and take on both sides – will be forthcoming this week.
But in the longer run, the Greeks cannot go on as they are. There may come a time when the prospect of short sharp pain – in the form of very high inflation and the mother of recessions – associated with a euro exit will be preferred over the long drawn-out agony of austerity. But that is just a guess.
The worst case scenario
It’s probably worth speculating on what might be the worst case scenario. Beginning with a failure to repay the IMF this evening we might then see the Greeks…
· fail to negotiate terms with other creditors, then
· lose support from the European Central Bank, which inspires a
· a run on its commercial banks, which
· forces the imposition of capital controls
That cascading set of events might force the Greeks to issue some form of new currency or quasi currency (tradable IOUs perhaps) which would be the prelude to an expulsion from the monetary union.
Actually, there is an outside chance that an agreement is reached this week but the Greek parliament fails to ratify the terms of the agreement… leading to an accidental exit (a ‘Graccident’). That might not be the end of it though. A Greek exit could conceivably inspire a run on banks in Portugal, Spain and maybe even Italy. And so it goes on.
Of course, none of that will happen overnight.
Implications for the stock market
We are in accord with JP Morgan’s Stephanie Flanders on this one…
‘The key takeaway for investors is that the Greek crisis does not pose an existential threat to either the euro system or to Europe’s financial system. Ultimately we do not believe that Greece alone will be enough to put the European recovery into reverse, or that it will prevent a gradual improvement in European corporate earnings. But there is still plenty of scope for nasty surprises and renewed volatility if the Greek situation continues to deteriorate.’ (Source: JPM Market Insights, 19 June 2015).
Back in 2011, when the euro crisis was as its peak, a Greek default would have been a catastrophe for the euro-zone. It would have spelt disaster for Europe’s banking system and various stock markets around the world would have plummeted. The same is probably not true today; a Greek default would not be a disaster either for the EU, the Eurozone or the stock market (in the long-run at least).
Of course, there is a great deal of complacency. Far too many managers and commentators are dismissive of a potential default; its eventuality would come as a shock to some and the stock market would react sharply while that complacency is washed away.
But does a Greek exit fundamentally alter the long-term potential for listed companies on the continent? How would such a happenstance irreversibly damage the likes of Daimler, Siemens, Louis Vuitton, Total, Airbus, Unilever or Heineken? In terms of the impact on markets we expect there to be short term volatility but this is all. Putting things in context Greece in GDP terms makes up just 1.8% of Europe.
In conclusion
Investors should hold risky assets only in the proportions that they are willing and able to hold for the duration of a significant downturn. This is why we spend time assessing clients attitudes to investment risk and explaining not just the returns but the risk as measured by volatility.
There is one thing that destroys wealth much more effectively than choosing the wrong fund here or there; carrying too much risk and selling out at the first sign of trouble – effectively ‘buying high and selling low’.
The above article is our opinion and is provided for information only purposes. Should you require bespoke, individual investment advice please get in touch.
This article is not intended to be acted on as individual advice and you should consult us before making any decisions.