Greek Tragedy?

Greek Tragedy?

Now what?

Photo: Ryan Maguire. Source: Gratisography

Yesterday Greek voters gave the Tsipras government a decisive victory when they rejected the terms of the latest bailout deal offered by creditors in June. Technically, the vote didn’t decide anything, since offer wasn’t really on the table anymore. But politically, it amounts to a vote of confidence in Tsipras’ hard line.

It seems likely that Greece will default on €7 billion in T-bill and loan payments coming due in July. They’ve already delayed payment on a €1.5 billion loan from the IMF, although the IMF says Greece is in “arrears”—not default. At this point most observers think the fallout from a Greek default will be limited, as most of its debt is held by the European Central Bank and other government—versus private—institutions.

But as we learned from Lehman’s bankruptcy in 2008, a default can have significant unexpected consequences. No one thought that Lehman’s default would cause a large money market fund to break the buck leading to a modern institutional bank run. At a minimum, a Greek default will upset markets, create uncertainty, and slow economic activity. But it’s now possible that Greece will leave the Euro altogether and go back to the Drachma. The Tsipras government says this is not their goal, but none of the other 18 Euro-zone nations are defaulting on their debt. An exit from the Euro by Greece (“Grexit”) would be painful, disruptive, and nasty.

European creditors could blink, and ease the terms they’re offering. But that’s doubtful. Public comments from officials since the referendum point to a hardening—not softening–of positions. Angela Merkel, the German Chancellor, seems unlikely to expend political capital on behalf of Greece. Despite the costs, a Grexit (and bank nationalization) seems the most likely outcome.

Amidst the chaos, two things are certain: 1). Any transition will involve a lot of economic pain for Greece; and 2). There will be lots of volatility.

Douglas Tengdin, CFA

Charter Trust Company

By | 2017-07-17T12:22:43+00:00 July 6th, 2015|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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