Macro Commentary

Fireworks will be going off this weekend.  Ironically, as people in the US are celebrating their independence, the people of Greece will be considering whether they want theirs from the euro common currency.  What a path that has led the Greek people to this point!  After months of negotiating and grandstanding, the rug was pulled out from the negotiating table when a public referendum on the bailout was announced for a date after default on repayments owed to the IMF.  The logistical questions aside of how such a vote happens so quickly, what really is the question being answered?  European politicians see this as whether Greece commits to staying in the monetary union implying that this is also a vote on confidence in Prime Minister Alexis Tspiras and the Syriza leadership who have so openly opposed their creditors.  Tspiras appears to believe that a “no” vote is somehow a point of leverage to improve the negotiating position of Greece in receiving a bailout and staying in the Eurozone on their own terms instead of those countries providing the capital.  It was said they were close to a deal last weekend, then he announces the referendum, waits for turmoil in the capital markets, presses early in the week for a renewed deal, gets rebuffed, puts his backing towards a “no” vote in the referendum and calls European leaders too scared to kick Greece out.  We haven’t seen that many “flip flops” since last year’s backyard barbeque bonanza. 

Each day in which the financial markets demonstrate confidence that the risk from a Greek exit is contained is a significant reduction in the credibility of the Greek leadership.  So far, capital controls in Greece have not caused depositors in Spain or Italy start to question their own financial institutions.  Research shows that roughly 80% of Greek sovereign debt is owned by the IMF, ECB, and Euro-area governments (including the European Financial Stability Fund) which are adequately capitalized to deal with default.  In addition, there are pan-European tools in place to manage the risk of contagion with programs that sound like alphabet soup (QE, OMT, EFSF, ESM, etc).  The Greek economy is too small to impact Eurozone growth and the Greek financial markets are too small to impact a diversified global investor.  In other words, the markets and European policy makers feel they can absorb the issues of Greece given their relative size.  This would not be the case if populism strengthens in other countries like Spain and Italy and reverses economic progress made there thus far.  At this point, policy makers need to send a message.  There is a quote here that applies (though debate ensues of who said it first).  “A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship.”  We will see if that is the Greek path or if they decide ignorance of trying to vote more for themselves is bliss.

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