Well now the fun really starts. Frankly we don’t know who is the least prepared for the ‘no’ vote – the Greeks themselves or the rest of the developed world.
As we have said all along, GREECE MUST EXIT THE EUROZONE.
Why? It simply can’t address its fiscal / structural imbalances in any other (effective) way. Five years of austerity has Greece in a similar position to where they began. The only way out for Greece now is to default on its debt and to undertake massive currency devaluation. The first stage is near complete. The second is yet to come.
We expect there will be plenty of political bargaining over the coming days / weeks. The Tsipras Government has been emboldened by the (reasonably strong) majority ‘no’ vote and will no doubt take the fight to both the Eurozone leaders and Greece’s creditors. Markets hate a lack of clarity in international markets and so we would anticipate increased volatility over the short term.
What will the Greeks bring to the table? What they always have – they want an end to austerity and they want to remain in the Euro. The reality is that they can’t have both. It’s difficult to see the Eurozone elites submitting to Greece’s demands. How can they? To do so would send a signal that any member of the Eurozone group can act recalcitrant without consequences. Further, it would render the austerity already undertaken by Italy, Portugal, Spain and Ireland (in getting their fiscal books in order) as high farce.
So expect more brinkmanship. The unfortunate truth is that now the stakes are even higher. The Greeks will push hard to get their ‘best of both worlds outcome’ and the European leaders will resist. At some stage we foresee ECB President Mario Draghi undertaking his ‘Whatever it Takes’ speech Mark II (only this time without Greece in the Euro) just to settle market nerves about possible contagion.
Given that the politics are rapidly hardening on both sides we don’t see much in the way of concessions being offered. Still, as the title to this piece testifies, we wouldn’t be surprised that every now and then the media will chase the odd political hare that a compromise will soon be reached. Varoufakis’ shock resignation is a case in point. It is possible that at the end of this messy process there will be a new Greek Drachma in place (possibly running in parallel to the Euro to help bed down the transition) at a significantly devalued rate.
So where’s the good news? Well, longer term we see a GREXIT as a great outcome for a stronger Greece and a stronger European Monetary Union (EMU). Given a massive currency devaluation, Greece will become the holiday destination of choice for Europe – thus aiding and abetting its economic turnaround. Negotiations with creditors for a much needed ‘debt haircut’ should also proceed more smoothly as a currency devaluation ‘resets the bar’ so to speak. For the rest of the EMU members, removing Greece should come as some form of comfort post the GREXIT separation mayhem. Indeed, we believe kicking a ‘non-paying’ member out of the Euro club will only firm up the market’s resolve that the Euro is here to stay for the longer term.
As for the markets, we’re certainly glad the majority of our international exposures are unhedged. Misery loves company and now that China is having its own internally inspired troubles at the same time as Greece is running amok, it’s bad for the $A and therefore good for our unhedged international positions. This will certainly help protect our portfolios from the losses that may come in international equity markets over coming days / weeks.