Greece and Europe: uncharted territory

Posted: June 29, 2015 in Uncategorized

That has been an eventful weekend.

5 June Greek referendum on the austerity measures imposed by the EuroGroup. Today capital controls* in a European country (second time, Cyprus the first)!

The key issue is the pensions. They have been mismanaged and over-generous (2013: 31.7% of Greeks were in pension (and only 40% of over 55 works) while OECD average was 25%..This represented 13% of GDP in 2013 (today 16%) versus an OECD average 7.8% (2013). And until the 2010/2013 reforms pension were close to 97% of the last salary.

The issue is that now, with the crisis and lack of job, entire families are surviving on the parents pension.

Implication for Greece.

The referendum is like a “nuclear option” for Syriza. They been elected with the mandate of cut austerity and stay in the Eurozone. Mission Impossible.

To be fair it is a good democratic way, but it seems that this was what Syriza wanted all along. So again, in all fairness, Syriza has not be fair as a referendum should have been called in May.

Also to call for a referendum AFTER the expiry of the bailout agreement and in such a short term (imagine just to organize the ballots with all those islands, not easy!). They want to push on emotions – not on rationale thinking (and, by the way, I still have to hear what is the proposal of Greece after Europe).

So this is clearly part of the negotiation strategy. In fact the IMF payments are “in arrears”, so the IMF has 1 month to declare Greece bankruptcy. And the next ECB payment is the 20 July. So, technically, there is still time.

If the Greeks vote NO – the Grexit become a real scenario. PM Tsiparas will go to Brussels on Monday 6 with requests probably unacceptable. A Grexit would pose a series of questions which will be on the table as there is no clear exit mechanism in the European Union (does an exit from the Euro implies an exit from the European Union?)

If Greeks vote YES – the Greek Government will have to call an election and probably lose. An elected new Government will be more amenable to creditors and Greece will continue in its “lost generation” issue.

So solution is neither close nor clear.

Markets

The market will sell off – not a big news and I posted about this a few days before in my technical analysis post (which was a big news!).

Markets hate uncertainty and we have plenty of them. As games (negotiations) are still going on it is too risky to take positions.

Remember that markets hate uncertainty – even if there was a clear Grexit the market could rally as the issue is finalized.

There will be a panic that could provoke a loss of 10-20% on the US Indexes (problematic as the US till now barely lost anything while other markets have been bashed – thank to the good work of the Fed Plunge Protection Team) – but not a full on crisis. But the bond markets in Europe and US are the one to watch!

Geopolitics.

The consequences of a potential Grexit are even more acute in geopolitics…what is Greece exit Euro, European Union and NATO. And allies itself with Russia and China?

Or what about the other anti European parties. Already Podemos and New Left parties in Spain made demonstrations pro Syriza in Madrid (elections in November).

Volatile time ahead!

*Capital Controls are, example, limits on ATM withdrawals, limit in bank transfers and not availability of international money transfers. naturally these affects everything, also tourism!

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