Greek Drama

Monday 06/01/15

     This week I am going to discuss the situation in Greece. This is a topic that I haven't visited recently even though it has been discussed ad nauseum in the financial media. Headlines out of Greece have been causing gyrations in global markets on and off for the last five years. Those gyrations are becoming more pronounced in recent months as Greece's financial condition has deteriorated to the point where they have very few options other than to beg for help or leave the euro. I have no inside information about Greek negotiations and I have no clue whether or not they will stay in the euro. I will give a brief background on the Greek drama without getting into too much detail (there is a lot of detail and a lot of acronyms) and then I want to look at what might happen if Greece leaves or if they stay.

    For the last several years Greece has been reliant on bailout loans from the European commission, the International Monetary Fund (IMF) and the European Central Bank (ECB). This group is collectively referred to as the Troika. The first bailout of Greece happened in 2010 when the Troika gave a €110 billion bailout to Greece with the requirement that Greece implement structural reforms and cuts often referred to as austerity measures. Although that was supposed to last through 2013, it didn't and another bailout loan for €130 billion was provided a year later to help recapitalize Greek banks, additionally private holders of Greek government bonds were forced to accept reduced interest rates, longer terms and a more than 50% cut in face value of the bonds. The second bailout extended through December 2014 and was granted a technical extension by the Troika, but a new deal has not yet been reached. Greece is now in danger of defaulting again as they have significant payments that they certainly cannot make in the next few months without additional aid.

    Over the last several months it has been the exact same story. Both sides enter negotiations and are optimistic about a deal and each time negotiations end without a resolution, then rumors are floated that a deal has been reached or that someone in Syriza (the current ruling party) has resigned and the rumors never seem to be true. In fact, at the moment of this writing there is a new rumor from an unknown source that a deal has been reached that is currently buoying the market. So now let's look at what I think would happen if there is a deal.


    The market hates uncertainty. If a deal is reached that extends the current situation for several years it will probably be viewed as a positive by the market, mostly because it will remove uncertainty for the time being. The yield on Greek bonds will drop, Greek banks and Greek stocks in general will perform well. Global markets will most likely react positively to this news. If the Troika agrees to a reduction in debt owed by Greece this would send stocks soaring and Greece would easily be able to return to the market and would likely benefit all of Europe. However, it would likely weaken the euro over time as the currency market would begin to price in debt forgiveness in other stressed European countries.

No Deal

    If there is no deal and Greece leaves the euro, it will probably not be nearly as bad as many are predicting. Stocks would probably fall globally as would the euro, however the drop will likely be short-lived, particularly in the euro. Assuming that other countries don't exit the euro, the market will slowly realize that Greece's departure actually means that the euro is now backed by a stronger set of countries and should strengthen somewhat. Greek exporters, particularly the shipping industry would be revitalized in the event of a Greek exit from the euro.

    As I mentioned before, I have no idea what will happen. However, I do expect some sort of deal this month. There is a major payment due on June 5th and it is unclear whether Greece will be able to borrow money to meet this payment; they certainly won't be able to meet the payments that are coming due in the next few months without a deal.
Index Closing Price Last Week YTD
SPY (S&P 500 ETF) 211.14 -0.59% 3.39%
IWM (Russell 2000 ETF) 123.89 -0.04% 4.22%
QQQ (Nasdaq 100 ETF) 110.05 -0.16% 7.18%

Yanis Varoufakis

Varoufakis is the current finance minister of Greece. There have been many false rumors that he will resign.