Asset Management: Multi-Asset Insights

Greece: Chaos or orderly resolution?

july-greece

The Facts
Greece has found itself in dire financial straits for the last few years (its first bailout was back in 2010), but the situation has become critical in recent weeks. The impetus for this was the election in January of this year of a radical left government that wished to reopen negotiations with creditors. Much of the response and commentary that we have seen from European politicians and central bankers has been political posturing that has masked the harsh reality: without significant debt restructuring, Greece will never be able to pay back its debts.

While Greece is small in economic terms, it is very relevant to broader Europe and future negotiations among various stakeholders – the fiscally strong countries, the fiscally weak countries and the troika: the European Central Bank (ECB), the International Monetary Fund (IMF) and the European Commission. While in our analysis it is essential to not trivialize the situation because of Greece’s size, as of today we do not see a significant uptick in risks that could derail the economic progress being made more broadly across Europe relative to expectations.

  • The “No” vote on Sunday does not mean that Greece will exit the eurozone, but by all accounts we are now much closer to such a scenario.
  • The “No” vote does mean that the ruling Syriza party, with its “anti-austerity” platform, remains in power for the time being.
  • The situation is very fluid. The Greek government is expected to present a proposal on Thursday to be evaluated by the European Commission and the ECB on Friday. EU leaders have given Greece a Sunday deadline to either come up with an agreement or else be kicked out of the euro. Despite the deadline, there is a real possibility of an extension if negotiations appear to be going in the right direction.
  • Greece has a 3.5 billion euro payment to the ECB due July 20. Failure to meet the payment could trigger default clauses (the failure to pay the IMF did not).
  • Market response has been relatively muted, but we are seeing some sizable intra-day movements as the markets digest the latest information. Also, the chaos in the Chinese markets has been lost in the shuffle, given the media and sell-side focus on all things Greece.

Our View

  • Since Syriza was voted into power in January, the situation in Greece has been most relevant in the context of how various players position themselves for the key issue at hand — the future of the eurozone.
  • Short term: While uncertainty will likely remain over the coming weeks and months, we draw a distinction between two types of potential resolution for Greece: orderly and chaotic. An orderly resolution might entail some type of debt relief for Greece and the temporary issue of a parallel currency alongside the euro. A chaotic resolution would result in an exit from the eurozone and may entail a very sharp recession, a collapse in tax revenue and the reintroduction of the drachma.
  • Long term: No matter how the Greek situation plays out, the long-term challenges of the common currency will not be solved. A primary risk is that fragmentation between the fiscally stronger countries and weaker countries will escalate to such a point that the probability of an ultimate collapse of the eurozone increases dramatically. It is this issue we are primarily focusing on and re-evaluating as the situation progresses.

Positioning
The developments in Greece and the eurozone over the last several days, culminating in the “No” vote on Sunday, do not change MAST positioning. We remain modestly overweight equities relative to bonds. Within equities we remain overweight non-U.S. developed and emerging market equities relative to U.S. equities.

 

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