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