Worried about the Greek election on Sunday? Join the club.
British financial authorities, through the Bank of England,
described their actions of earmarking $100 billion pounds ($155
billion) for potential banking-liquidity crises as a response to
the "dark cloud" over Europe.
Lots of Brits are hyper-critical of the eurozone crisis because it
impacts the UK economy quite directly, even though they are
grateful not to be a member of the monetary union. Ever watch Nigel
Farage, leader of the UK Independence Party, go on an EU rant aimed
directly at its leaders? It is must-see-youtube. I normally don't
favor ad hominem arguments, but Mr. Farage is such an excellent
orator and passionate, unrelenting debater that you can feel his
conviction and his love of Europe.
No Way Out But Straight Down?
Whatever the simple mistakes in the creation and management of the
single-currency regime in the past thirteen years, the problems and
solutions just became drastically more complex in the past three.
While on the surface it appears that the Greek election is a simple
choice between the leftist, anti-austerity, anti-bailout party
SYRIZA and the moderate, pro-bailout New Democracy, the actual
outcomes are a bit more complicated.
First of all, the chances that this election still does not result
in a ruling coalition government are significant. I like the way
Brian Sullivan of CNBC summed it up in a
published Thursday night...
"While the June 17 election is not directly billed as a referendum
on Greece paying its debts and staying in the euro, it might as
well be. If no party wins enough votes to form a coalition, as with
the last vote, then the Greek situation may very well remain as it
is now -- a jumbled mess of no real leadership, no real plan and
perhaps no real way to stay a member of the euro zone economic
Why no real way to stay a member of the EMU family? Because if
Greece doesn't move faster on complying with the terms of their 2nd
bailout, then the EU won't honor their side of the agreement. Even
if Syriza's radical leader Tsipras simply comes to power and
attempts to renegotiate, that's a better outcome than no government
and a third election.
And the EU came out on Thursday saying they would consider tweaking
some of the terms of the deal struck in February. While they won't
alter the main targets, they said that there could be some
flexibility in how to get there.
From the Reuters story
Euro zone may tinker with Greek bailout terms after
"Under the memorandum of understanding detailing the terms of its
130 billion euro bailout, Greece must cut its debt to 116.5 percent
of GDP, from 165 percent in 2011.
"This can only be achieved through savage public spending cuts,
sweeping structural reforms and privatizations - all of which face
substantial opposition in Greece."
But renegotiating any of the terms and path to massive fiscal
improvement that the bailout demands still requires a ruling
coalition. And the Greek electoral process has some unique
protocols that could give us another government in limbo.
For a new government to exist, it needs to have a simple majority
of the 300 seats in the Greek Parliament. But the most recent
polls, formal and otherwise, have been close enough to suggest that
this could easily end in another stalemate -- especially since the
socialist PASOK party help split the vote in early May.
While the majority of Greek citizens want to remain in the eurozone
monetary union, they obviously have different ideas about who is
best to lead them and keep them there. Many probably believe
Tsipras that they can stay in the euro while he defies "the troika"
(EU Commission, ECB, and IMF) on the terms of painful austerity.
On top of this, the party which does win a majority of votes gets a
bonus of 50 seats and the remaining 250 are distributed
proportionally to the percentages obtained between those parties
that received at least 3% of the vote. Therefore, the outcome is
dependent on the party that comes in first, the number of parties
that get into Parliament with at least 3% of the vote and the
percentage that each party achieves.
This brings us to the second set of complexities: how an election
victory could result in at least three different government
coalition possibilities. I have read reports from several global
investment banks on how they are "gaming" the election results and
the subsequent market impacts. Most of them turn into big decision
trees and flow charts of complexity as they weigh all the variables
I will share one simplified version from Bank of America/Merrill
Lynch and a depressing one from Goldman Sachs. But first, let me go
back to Sullivan's piece because he has takes some of the potential
results and impacts and makes them even simpler:
BEST FOR THE MARKETS: A New Democracy win with enough Pasok support
to gain 151 seats in parliament.
SLIGHTLY BETTER / STAYS THE SAME: A win by New Democracy yet
without the 151 votes combined with Pasok to form a ruling
coalition. This outcome gets tricky because the winner would have
to scramble to enlist the support of the other two more moderate
parties, Democratic Left and Independent Greeks, to reach a deal
that would effectively form a coalition.
And not all of these "moderates" necessarily agree on the details
of the bailout and its austerity requirements, so this still
creates a lot of uncertainty about their ability to move forward.
The good news is that they all want Greece to stay in the euro. The
bad news is that they are politicians.
BAD FOR MARKETS: A big win by Syriza. This one doesn't need much
explanation other than "strap your helmet on" cause Mr. Tsipras is
likely to drive his country off a cliff as he demands things from
the troika that they are likely not going to give him.
And here is the BofA simplified scenario menu:
Base case (high probability): election result allows Greece to form
a pro-EU government; limited European policy response.
Bull case (low probability): election result means Greece does not
form a pro-EU government; substantial ECB & European policy
Bear case (low to medium probability): election result means Greece
does not form a pro-EU government; limited ECB/ European policy
Finally, here is my paraphrased version of the Goldman Sachs market
forecast, mostly centered around continued stormy weather between
Greece and the troika...
1. Hazy: Election results are inconclusive or result in an unstable
Troika response: Interruption of funds for primary deficits and
possibly structural funds as well
Impacts on Greece: 4% recession over next year. Stronger shock of
up to 10% within 6 months.
Impacts on Europe and US: Somewhat neutral with initial shock
possible. Bund and Treasury yields rise as flight to safety
unwinds. Euro currency bottoms.
2. Victory for Syriza coalition rejecting austerity.
Troika response: Above plus debt service payments and requires
FIREWALL for euro banks and sovereigns
Impacts on Greece: Banks come under increasing pressure and "slow
Grexit" becomes more probable
Impacts on Europe and US: Bigger shock to Eurozone economy (1% off
GDP) and stocks, yields, euro fall but then bottom
3. Dark: Greece unilaterally repudiates liabilities
Troika response: Most liquidity to Greek banking system cut off
Impacts on Greece: "Fast Grexit" scenario with inability to
credibly establish new currency (it's not as if you can just say
"Hey, we're going back to the Drachma" at the flip of a printing
Impacts on Europe and US: Eurozone GDP drops 2%, euro falls to new
crisis lows, new low yields for Treasuries and Bunds on panic
flight to safety, stocks enter bear market.
You gotta love democracy. It's roots were born in Greece some 2,500
years ago. And it may just kill them as a nation, or at least as a
going economic concern.
Just don't let it ruin your Father's Day. I have a feeling it's
going to be a long hot summer with lots more Greek tragedy to come.
Kevin Cook is a Senior Stock Strategist with
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