Greece votes a resounding 61% “No” to the Troika debt proposals, yet
financial markets remain largely unfazed, with European equity markets
declining initially by less than 2% and 10 year bond yields for Italy,
Spain and Portugal harden by less than 10bps. With traders having been
weaned on a succession of last minute resolutions to avert a crisis (US
sub-prime, US debt caps, PIIG’s, to name a few) markets seem to be
clutching at the conciliatory comments by Alexis Tsipras and resignation
of Yanis Varoufakis together with Angela Merkel’s comments that the
Greeks’ decision must “be respected”, whatever that is supposed to mean.
But is this a move towards conciliation that is being assumed by
markets or an attempt by wily politicians to distance themselves from
the impending train-wreck? Should one follow the market conditioning of
the past five years and ‘buy the dip’ (http://www.youtube.com/watch?v=0akBdQa55b4) or take note of that the economists at both JP Morgan and Barclays working models now assumes ‘Grexit’?
It
is looking increasingly obvious that the Troika negotiations have been
set up to fail. Greece is bust and has been for years. EU bureaucrats
want to hide it, but Tsipras knows this, so does Merkel, the IMF and
even my mother. Another so called bailout that merely adds more debt to
pay the interest back to the bankers on the last lot and keep the Greek
people in debt bondage for another two generations is now no longer a
politically viable option. The terms of that last bailout, which saw
over 90% of the €240bn package go back to financial institutions rather
than the Greeks, has done the Troika no favours in selling its latest
‘deal’. Politically, Merkel cannot concede the principal of debt
forgiveness to Greece given the long line of other EU petitioners who
will demand the same, particularly now that the ECB has ECJ clearance
for QE. Tsipras however can demand now less given his original election
mandate and now the referendum. The referendum was less about giving him
better legitimacy to negotiate a better deal from Merkel, but a mandate
to reject the Troika. Up until a couple of weeks ago, markets were
expecting Tsipras to submit to theTroika’s proposals notwithstanding his
election mandate. Now, the mandate is explicit in that he is unable to
concede. Burning ones ships to ensure no turning back, may not have been
an Athenian tactic, but they seem to have learnt from Cortes. With
suitable goading from his finance minister and game theoretician, Yanis
Varoufakis, the Troika have adopted a hard line in negotiations and a
proposal that Tsipras could take back to Athens to get squashed, but
from which it will be nigh impossible for either side to substantively
retreat from. Varoufakis’s resignation at his moment of victory
therefore is not about securing concessions that cannot be made, but to
remove himself as factor from the inevitable collapse in negotiations.
This has been set up not just to fail, but to leave the Troika taking
most of the responsibility for it.
Over the next few
days, markets will urge investors to buy the dip, but may have a rude
awakening. Some ‘leading’ investment houses were even recommending
investors rotate into financials last week and ahead of the referendum,
no doubt hoping for a ‘Yes’ vote and citing that the ECB has now
relieved most of the banks of their direct Greek bond exposure, although
not the unknown derivative tail risk. We are not aware of whether their
recommendation has now been revised following the result or whether
they are compounding the error by attempting to brazen out the newsflow
with hopes that a last minute debt resolution. Either way, these remain
dangerous waters to be exposed to financials, particularly amongst the
EU peripherals. The first test meanwhile may come as early as next week when a small
Japanese (Samurai) bond of approx Yen 20bn matures. Will this be the
first credit event and domino?
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