HELLENIC HADES APPROACHES

As we approach the June Solstice in the northern hemisphere, we would do well to remember that in Greece and North America at this time of year it is known as the longest day of the year. The Latin from which the name is derived is “Solstitium” which means nothing less than “sun-stopping”. So, as we approach the final chapter in a farcical end game between Greece and the IMF/EU/ECB/EFSM/EC/European-taxpayers/(insert acronym beginning with “E”), we truly are about to finally watch the sun stop shining on Greece’s financial credibility. Again.

 

Angela Merkel, the Chancellor of Germany, now finds herself pulled into political discourse due to her to date unbridled support of expending all possible efforts to extend to Greece the means to avoid default. The way political parties have to share power to govern in Germany is in fact quite similar to in Greece. Merkel’s Christian Democratic Union party (centre-right) could not hold power in its own right. Neither can Tsipras’ communist-principled party, Syriza. Merkel shares, indeed owes, her power with the Christian Social Union party (centre-left). In this party coalition, Wolfgang Schauble ranks second only to Merkel and in return for his allegiance and willingness to work with a coalition, holds the post of Minister for Finance in “Merkel’s” government. In recent weeks there have been noticeable fractures between both Merkel and Schauble, with Merkel wanting to be more lenient towards Greece in order to reach a deal, and Schauble wanting Greece to pay what owes or leave the EU. In Greece, the other parties Syriza shares power with in order to govern have approached Tsipras’ tin ear, begging him to not risk Greece’s inclusion in the EU and the Euro currency.

 

Tsipras’ own political judgement is observably sub-optimal. This is a man who joined the Stalinist Greek Communist Party in 1991. That year, he would have received his membership card just in time to watch the Soviet Union finally come to the conclusion that after around 50 years of communism, it didn’t really seem to be working for the people. The government’s fiscal affairs were poorly run and essentially broke, so they discarded the communist model and became the Russian Federation. At Tsipras’ right hand as Finance Minister sits another self-avowed communist who, despite being an academic and having authored a book on game-theory, doesn’t seem to have made the transition to the big leagues known as “the real world” particularly well at all.

 

The IMF will come calling by June 30 for EUR1.5 billion. Then, in a mere matter of weeks, the total bill owed to creditors will reach EUR7.2 billion. Should Greece even miss the EUR1.5 billion payment to the IMF (which they will) then they will find themselves in the esteemed “ZZZ” rated class of Zaire, Zambia and Zimbabwe. You couldn’t make this stuff up even if you tried to. No “developed” country has ever before in history missed a repayment to the IMF. This of course speaks to the heart of the matter. Why was Greece ever allowed to rank as AAA rated (their debt was as good as German debt) when they, now proven to be fraudulently, entered the EU? As Wolfgang Schauble said in 2012, when the Europeans were asked to provide another EUR130 billion, “Why do they deserve another 130 when 100 two years earlier [sic.] had proved insufficient”. Wolfgang’s comments embody the argument that you simply cannot have a political union without fiscal union within the European Union.

 

So what happens next globally after Greek defaults? Do we get to see a repeat of 2011 when other nations in the periphery fall under the same spell of sovereign contagion as Greece’s debt markets? Do we get a return to the blowout in sovereign spreads for Spain, Italy and Portugal in the region of 640 bps over German Bunds? Bunds have, at certain maturities, only just re-entered positive yield territory again in the past 4 weeks.

 

Materially speaking, Greece is of course immaterial. This is applicable to both the operations of the EU should Greece depart and also global financial markets. Apologies to those of Hellenic descent, but Greece’s USD$241 billion GDP contribution per annum to EU’s USD$17.3 Trillion GDP is only 1.3%, which therefore represents 0.047% of the USD$509 Trillion of global GDP. To put this in perspective though, as the World Bank tells us, Greece’s economy is still larger than Kazakhstan, Azerbiajan or Uzbekistan. The Greece FTSE Large Cap index has lost 50.8% in the last 12 months since June 2014. The FTSE/AThex Large Cap index had a combined value at time of writing of USD$38.1 billion as at 19 June 2015. To put this in perspective, the single stock Australian and New Zealand Bank has a market cap of (in comparable USD terms) of USD$70.2 billion.

 

Greece will, as sure the sun sets, default on its debt. This will hardly be a trailblazing event when it comes to Greek financial history. The current Greek administration needs to cease and desist pursuing academic games and embrace mathematical reality. The question that Tsipras and his comrades should start devoting their time and attention to is whether, once the default occurs, do they choose to remain in the EU, and if so, on which currency. After they have made this decision (if they stay, they should no longer expect any sweetheart funding subsidy deals from the Germans, Scandinavian states or any other member state of the EU whose population pay taxes) then they need to decide if they stay on the Euro currency, or revert to the Drachma. Again.

 

The smart play here would be to promptly default, put global financial markets out of their misery and beg humbly to stay in the European Union, whilst exiting the European Area (countries in the EU that trade on the Euro) and revert to the Drachma.

 

The summer solstice marks the start of summer. This may bring short-lived joy because only a few months later this means that winter will follow. With the European grand project called the “EU”, we are concerned that a “successful” resolution to a Greek default may disprove the old notion that it is darkest before the dawn.

 

The largest stock by market cap on the Greek exchange is “Coca-Cola” and its weighting constitutes 54% of the entire index (ref. Athens Exchange Group). The sixth largest stock by market cap is the “Greek Organisation of Football Prognostics”. Syriza’s leader, Alex Tsipras rides a motorbike with a symbol that shares the colours of the Greek flag, but is made by a Motor Works company in Bavaria. This is and always has been (since 2011) an issue of political ideology vs material impact. Everyone wants the finer things in life, but if you buy them with borrowed money, one day you must pay the piper.

 

References:

The Athex Exchange Group

Factset

The Financial Times

The World Bank

 

Marcel von Pfyffer

Q.E.D.

Slide – 1

Comments are closed.