A Greek Tragedy

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Op-Ed by Steen Jakobsen, Chief Economist of Saxo Bank

Grexit
Yes to Grexit. A man demonstrating against yielding to EU austerity measures in Athens, Greece. Photo-Jan Wellmann

This is now officially a Greek tragedy.

In many ways, it is relatively easy to understand why the result was a No from Greece. There is little to lose, as a Yes to more austerity hardly was a great choice for a society on the brink of a social breakdown.

The vote clearly was not of any help by the fact that the actual vote: Yes or No was confusing. What did they actually say No to?

RELATED:  The Greek ‘No’ is an important buying opportunity for investors

This does not change that I firmly believed Greece would say yes and unseat a government that is more interested in their own survival than the country’s destiny.  What comes next politically is difficult to predict but markets are slightly easier:

  • DAX will open down 5% – again – and probably lose 10% during next few weeks unless ECB and Fed does a repeat of 2010-11 plunged protection teams.
  • The Club Med spreads will rise 20-50 bps over the next few weeks…
  • Bulgaria, Croatia, Romania should see considerable spread increases
  • EUR/USD – that is the difficult one: I expect a weaker open, but if… Greece is actually going to leave the EURO then it will be stronger by the end of week. For now I expect 2-5% range the first 24/48 hours (Early Sunday night indication points to: 1.0990/1.1000 (i.e. down 120 pips)

RELATED: Vicious Circle – Will bankrupt Greece set fire to the world economy?

Compared with CNBC’s prediction:

The real risk remains the illiquidity of the market. Do not forget that through government intervention (QE’s) in the bond market there is no two-way market. No market makers and no risk capital (due to capital requirement and regulation)

Merril Lynch Bond Volatility

The big other risk is that banks will NOT re-open despite the assurances by Greek government on Tuesday. Will it lead to 30% haircut on depositors as FT wrote over the weekend?

Comments are fast and furious – many gloating and playing games, but where is the long-term solution?

The solution where Greece gets a haircut but also make real commitments to redefining a new Greece. SYRIZA showed how powerful they are in an environment of “pretend-and-extend” from Europe the same “pretend-and-extend” is now dead. The change of macro policies always comes from failing. This is one of the biggest failings in Europe history.

The Plan A was to do pretend-and-extend. Plan B was to use “carrot and sticks” – and Plan C – was not to have a plan! Having no plan is not a plan, as it’s pretty obvious now, but it’s good news in the sense that someone now needs to own up to the loss’ which has been moved forward and forward with no reforms, no structural changes and with no hope.

Zero hope, Zero reform and Zero willingness to change equals Greece of tomorrow, with no access to finance, very little friends, and a future which is, if possible, is even more dire.

Europe on the other hand also lost – my classic argument since day one: The Greek tragedy is one without solutions. No winners, only losers. Europe looks inflexible and stubborn. Clearly we finance people understand and mostly agree with the medicine prescript, but at all times any policy needs to embedded in democracy and in the ability of carrying through on the plan. Europe as often before not failed but played for broke.

SYRIZA and Greece however probably lost more. The mere idea they will have a new deal in 24 hours is pure fantasy as it has been every week when the Finance Minister promised us a plan by next week.

Like Europe, however, they do not have a Plan B or Plan C. Only rhetoric’s and that with lines, which reminds me of Eastern Europe before 1989.

I love sports analogies as much as most people hate them: This is a football match being played without referees and rules now. Either team can claims to have won: Greece is claiming they made the highest amount of free kicks and that three free kicks against them equals a goal for Greece, while EU and ECB claims the fact they had more corners than Greece make them the winners. The point of course with no rules, no referees, it’s anybody’s call, but of course, in a regular match these two sides drew nil-nil.

To show how the two sides continues to ignore them both have lost here is a few headlines:

Hardly if you read official Europe quick response and put it in the context of the comments and front pages before the referendum: Greece breaking news Germany….

Then The Guardian front page the other day: Hardly an open invitation

Not that Bild is Germany, but 89%

Anyone who thinks Schauble is unpopular needs to reads this:

http://www.faz.net/aktuell/wirtschaft/eurokrise/griechenland/vor-dem-referendum-alle-hassen-schaeuble-niemand-hasst-deutschland-13684498.html

The first bank to comment: JP Morgan base case is now Grexit


This, however, is what we should be talking about:

A Greece who lost it ways and see no alternative to “revolution”…

IMF opened a new “flank” with a dose of reality.

IMF Greece

Conclusion:

  • Consensus is surprised by the election.
  • Illiquidity is the big risk.
  • Grexit is now base case.
  • There is 25% chance of Europe finding the “geopolitical situation” so important that they extend help to Greece despite harsh words – but still 75% against.
  • Market will see 5% drop in equities, 20-50 in fixed income spread expansion, Eastern Europe will hurt more, uncertainty has increased (which market never likes), Greece banks will most likely remain closed, EURUSD should drop 2-3 figures at the most, and it is a screaming buy now we have “reality” vs. talk, talk.

Pretend and extend died tonight, hopefully its replaced with a normal business cycle, normal ebbs and flows, but first politicians will try to save face but trying to do just one more rounds of pretend-and-extend, but patient has died.

(Steen Jakobsen is Chief Economist at Saxo Bank)

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