Hello, readers, and welcome to a new Critical Week for the EuroTM![i] It will have rumors, summits and deadlines galore.[ii] Sensationalism and hyperbole will rule the headlines. Things will sound scary and crazy. If markets don’t wobble, headlines will warn stocks are complacent and ignoring huge risk. If markets do wobble, headlines will warn the endgame is finally coming. If you are into political theater, it will be entertaining as all get out. If you are into wordplay, you will giggle over the Grexhaustion, Grexcitement[iii], Grexit and Graccident and sigh over the dra(ch)ma and rumors of drachmail.[iv] If you are trying to ignore the spectacle and figure out what it all means for your investments, you might well find the cacophony confusing and contradictory. So here is our attempt at a rational rundown of what’s at stake, what’s coming up and why the outcome probably doesn’t mean much for global markets, regardless of what that outcome is.
As best as we can tell, here is where things stand now, at 1:10 PM Pacific Daylight Time on June 22.[v] Greece’s bailout extension expires next Tuesday, June 30. If Greece and creditors agree on reforms by then, they get the €7.2 billion left in the bailout. No deal, no money, and Greece faces almost certain bankruptcy. For now, they seem to be inching toward a deal. After promising to say “the big no” to more austerity last week, Greek PM Alexis Tsipras and his team of negotiators submitted a new reform proposal that made a “potentially major concession on pensions” late Sunday (or early Monday, depending on the source). The ever-leaky unnamed sources familiar with talks said that concession is eliminating early retirement next year, replacing the planned gradual phase-out. Tax concessions reportedly include doubling VAT on hotels and hiking taxes on business profits over €500,000 annually and annual incomes over €30,000. The goal here is to close a €900 million budget gap between Greece’s earlier proposals and creditors’ demands, and Athens estimates their plan will hit fairly close to creditors’ target. Jeroen Dijsselbloem, head of the Eurogroup (the official name for the gang of eurozone finance ministers), called it “a welcome step in a positive direction” and “an opportunity to get that deal later this week.”
Temper your enthusiasm, though, because there is a lot of ground to cover, and not everyone shares Dijsselbloem’s optimism. Entering Monday’s Eurogroup meeting, the German, Irish and Finnish finance ministers threw cold water on hopes of a deal in the near future. Dijsselbloem warned they’d all “really need to look at the specifics to see whether it adds up in fiscal terms.” The Eurogroup meeting wrapped with no announcements or fanfare. The emergency eurozone leaders’ summit held Monday was similarly inconclusive—partly because Greece evidently submitted two versions of its plan, partly because no one had enough time to read the whole shebang before they all sat down.
The next big day is Wednesday, when the Eurogroup reconvenes. A full EU summit happens Thursday. Talks will likely continue between now and then, and all sides are optimistic about a deal. But given how many times talks have stopped and started over the last five months, we’d suggest tempering enthusiasm.
Same advice goes for any leaks and rumors you see over the next few days. Several times now, some unnamed source has told the media a deal is close, only for someone else to deny it a few minutes to a few hours later. Last Thursday, at a eurozone summit, there was a rumor the EU and ECB had agreed to kick the can for another six months, giving Greece another €10 billion while they were at it, and excluding the IMF. But German Chancellor Angela Merkel quashed it within half an hour. The prior week, reports said Germany had agreed to unlock some funding for each reform Greece agreed to—say, €1 billion for tax hikes, another €1 billion for privatizations and so on—but that quickly fell through. If Dijsselbloem and the rest of the Eurogroup decide Greece’s numbers don’t add up, this could fall through, too. Current uncertainty is highlighted by reports the Eurogroup discussed capital controls at Monday’s meeting. Those reports, however, were subsequently denied.[vi]
If they don’t get a deal by Thursday or Friday, we suspect the hypometer will go to 11. Greece’s €1.6 billion IMF bill is due on June 30, and they owe the ECB €3.5 billion by July 20. Whether Greece has cash for the IMF depends on who you ask—tax revenues plunged in May, and interest payments ate up the Treasury’s primary surplus. We suspect officials are presently rooting around under the sofa cushions, under the furniture and inside the pockets of Finance Minister Yanis Varoufakis’ leather motorcycle jacket for spare change, just in case.
Anyway, so the big question is “what if Greece doesn’t pay the IMF and ECB?” And we can speculate, though that’s about it. The big credit ratings agencies have already said they will not consider this a debt default, because bailout money from supranational organizations isn’t marketable debt—but that doesn’t mean much, considering markets tend to pay more attention to what Greece actually does than what the credit raters say. Missing an IMF payment might scare financial markets, though they might have priced it in already, following months of missed-payment fears and the early-June decision to bundle all payments at month’s end. Near as we can tell, though, the risks here are more reputational than economic. It would put Greece in a special category with Zimbabwe and the banana-republic all-star list, but otherwise, it’s basically an accounting move. Missing ECB payments is stickier, because that would probably prevent the ECB from extending its lifeline to Greek banks—perhaps triggering capital controls and bank failures. That isn’t good for Greece, but markets barely blinked when Cyprus endured it two-plus years ago. We suspect markets are pricing all this in at the moment, too, considering how many bank deposits are presently fleeing Greek banks. Which itself isn’t surprising anyone. The four major listed Greek banks’ stocks are down between -38% and -66% in 2015 and -74% and -85% in the last year.[vii] In the meantime, though, ECB chief Mario Draghi extended Greece’s lifeline Monday and pledged to keep the IV drip running until at least June 30.
So what is the real do-or-die-make-or-break day for Greece? Maybe June 30, maybe July 20, maybe some other arbitrary date they all cook up. Actually, we think The Telegraph’s “Matt” cartoon nailed it with this snappy doodle on Saturday—crunch day, last chance and the brink are all quite fungible. And they can always kick the can. If no deal is in sight by June 30, they can say “oops we meant July 31.” That’s the beauty of lines drawn in the sand, no matter how “red” they might be.
But here is what matters: If everything goes belly up in the end, we are talking about some very small numbers. Greece’s economy is about $200 billion. With a “B.” The world economy is over $77 trillion. With a “T-R.” Greece’s debt is about $350 billion. The Bank of Greece’s liabilities with the rest of the eurozone’s central banking system are about €100 billion—and the only payment due is the 0.05% annual interest payment. That is €50 million annually. To borrow a thought experiment from Bloomberg’s Leonid Bershidsky, if Greece just disappeared off the map one day, the lost output would be minimal—0.3% of world GDP. Growth elsewhere can easily offset that. Debt writeoffs would equal about 0.5% of world GDP, and only a fraction of those writeoffs would occur in the private sector. Most of them would hit eurozone governments, ranging between 1% and 2% of GDP depending on the country. Not catastrophic.
As for Greece maybe leaving the euro—the widely feared Grexit—most of the global fallout would be sociological. Economically, it probably wouldn’t be much different from any other nation that has defended and then discarded a currency peg—bad for that country in the near term, but isolated and insulated. Asia’s late-1990s currency crises, Brazil in 1999, Mexico’s 1994 “Tequila Crisis,” China’s 1994 devaluation and Latin America’s early-1980s crises did not cause global bear markets or recessions. Local banks, companies and citizens had a hard road, but contagion didn’t go global. Even when Europe’s Exchange Rate Mechanism—a euro precursor—collapsed in 1993, the rest of the world pulled through fine. Maybe it’s different this time! But Sir John Templeton called those the four most dangerous words in investing for a reason.
Anyway, we just paused to peruse the headlines again, and as of 2:47 PM Pacific Daylight Time on June 22, The Telegraph says “European Raise Hopes of a Deal in 48 Hours as Tsipras Forced to Swallow Austerity.” European Commission President Jean-Claude Juncker says the European Council is ready to offer Greece $35 billion in investment (code for fiscal stimulus, we presume). Reuters reports German Chancellor Angela Merkel said all EU leaders are committed to reaching a deal but didn’t discuss extending the bailout past next week. She also pooh-poohed Greek debt relief for now. So, all fairly optimistic as everyone in euroland heads off to bed.
Time will tell whether this pans out for Greece. If it is smooth sailing from here, great! If not, take a deep breath, grit your teeth, and check our “Headlines” tab for a rational assessment.[viii]
[i] We haven’t actually trademarked it, and we haven’t heard of anyone else doing so. We do, however, have a snazzy moniker all lined up and ready to go for when Greece writes down its debt again, presuming that happens at some point, as markets seem to expect. It would be the third default since 2012, which gives you a hint as to the name, but we won’t spoil it just yet.
[ii] And live blogs. We love live blogs. We even loved this totally unrelated fake live blog of the Battle of Waterloo, which we still can’t believe actually happened last week. Work of genius.
[iii] Ok so we’re still waiting for this one. We Grexpect it any day now.
[iv] If you are not into wordplay, you probably found this sentence Grexceedingly tiresome, and for that, we offer our deepest Gregrets.
[v] We’re compelled to put the timestamp there because this saga changes by the hour, and it might well have changed by the time you read this—it is late in Europe, but they’re fond of late-night conference calls and Parliamentary jam sessions.
[vii] Factset, as of 6/22/2015. The four “major” Greek banks are Alpha Bank AE, Eurobank Ergasias SA, National Bank of Greece and Piraeus Bank. They are down between -94% and -99% in the last five years, too.
[viii] And probably a joke or two.