Greece ..... what else could it be ? And what now ?

Monday 6th July 2015

Greece ..... what else could it be ? And what now ?

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Wow ..... the twists and turns of the Greek saga have seldom failed to astound, but very few would have imagined that as many as 61% of voters would choose to reject the creditors conditions in yesterday's referendum. Was it just this observer who watched the footage of Greeks young and old celebrating in Athens last night with a terrible sense of foreboding ?

Finance Minister Varoufakis, in creditors' eyes the "enfant terrible" of the whole production, has this morning resigned, acknowledging with pride that the enmity and distrust that he has engendered amongst "some" opposing negotiators may mean that things might go better with someone else at the Greek helm. He says he'll still be around in the background to advise his friend PM Tsipras though .... make no mistake, we have not seen the last of Mr Varoufakis. He's right that his absence will improve relations on a strictly personal level, but frankly it will make no difference to bridging the enormous gap between the two sides on the fundamental issues. Mr Tsipras says the vote emboldens and strengthens Greece's hand at the negotiating table, which from this vantage point at least would suggest a deal is less rather than more likely.

The market reaction ? The euro and European stocks are lower and there has been some "flight to quality" from peripheral bond markets into their safer equivalents (US, Germany, UK etc) but certainly nothing dramatic, especially by recent standards. The relative calm points to two things : One, that Europe and its banking system has been pretty effectively firewalled against a Greek collapse since 2012 and two, that nobody really knows how this will all pan out.

The issue that immediately needs addressing is the matter of liquidity injections from the ECB to keep Greeks banks afloat. These were frozen last week and emboldened or not Mr Tsipras will surely have to make some of the right noises in order to get the taps turned on again, unless of course political pressures overcome economic rectitude. This shouldn't happen but just might, but only in the very short term. Then we have the wider issues of a further 29.5bn euro bail-out (they'll need more), debt restructuring (longer maturities, lower rates) and inevitably, debt relief. France is heading the more doveish approach to Greece but would seem to face a hard job convincing many of its Eurozone partners, both large and small, that this would be the sensible course. It's sometimes easy to forget that the numerous "acronymed" bodies involved mask the fact that ultimately any write-off would largely be borne by tax-payers in individual member states.

Opinion is still split over the likelihood of Grexit, but unsurprisingly more big names have this morning sided with the view that it is more likely than not.  J.P. Morgan and Soc Gen have both put the probability of Grexit at 65% (which, as we discussed the other day, still allows them a 35% possibility that it won't happen ! ) . Either way and inescapably, the Euro will emerge damaged from the whole affair. If the lenders hold firm and Greece goes, there will be accusations of mismanagement since 2010 and a perception that the Euro may not be a solid single currency after all but rather a fixed exchange rate mechanism that members can fall out of, which of course makes it much more vulnerable  --  remember the UK and its disastrous attempt to maintain its level in ERM ? But this may well be the lesser of two evils.....

If a deal is agreed that allows Greece too soft a ride, it will inevitably be seen as an irresponsible member successfully blackmailing the authorities that govern the union. Not only would it hugely undermine its credibility, but what would the other peripheral nations who have already swallowed the pain make of it ? And if Greece's Syriza government has been successful in rejecting austerity (some might simply call it fiscal responsibility), what would go through the minds of Spain's fast-growing Podemos party for example, which is closely aligned with Syriza ? There are countless anti-austerity and nationalist parties in Europe on both the left and the right who would surely feel similarly emboldened to test the determination of the Eurozone authorities to enforce the disciplines required for monetary union. The domino effect could be catastrophic. It would not be overly pessimistic to suggest that the future of the euro, and by extension the nature of the European Union itself, is at stake here. And whether we know it or not, we all have a stake in that.