Greece Votes No – What Does It Mean?

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Over the weekend, while we were all celebrating the 4th of July holiday, the voters in Greece came to the polls in a national referendum and voted no (or Oxi, if you’re Greek) against the latest proposed International Monetary Fund and European Central Bank bailout.

We certainly don’t know everything about what has happened or what will happen, but will do our best here to give an overview so you can better understand what is happening in the news and in your portfolios.

Some quick acronyms for easier reading:
IMF = International Monetary Fund
ECB = European Central Bank

How Did We Get Here?

On June 30th, Greece missed a loan payment to the IMF of 1.55 Billion Euros, putting the country in default.

Greece has been heading towards this moment for years.  They qualified for membership in the Euro with some questionable accounting from the Greek government (revisions in the economic numbers always seem to happen after a new government was elected, showing the previous government had been more optimistic with the books).  Membership in the Euro allowed their borrowing costs to decline substantially and the easy credit was too tempting for governments to pass up.  After the financial crisis in 2008-2009, problems started to creep in necessitating the first set of bailouts by the ECB.  Another bailout came into place in 2012 with more changes required by the international lenders that caused reforms to pension and tax systems within Greece that has ultimately led us to this weekend’s referendum.

(For a fascinating and fun read on Greece and other countries affected by the 2008 financial crisis – I highly recommend Boomerang by Michael Lewis.  If you’d like a copy we’d be glad to send you one.  Just let us know and we’ll send a copy over)

What Will Happen Now?

The first results will show up in the Greek Banks.  The Greeks have had capital controls placed on the banks for the past few weeks, limiting withdrawals from ATMs of 60 Euros per day, causing nervous greeks to stand in long lines to make their daily withdrawal.  With the No vote, the ECB is no longer providing ’emergency liquidity assistance’ so the deposits in Greek banks are dwindling.  A perfect storm of fear from depositors leads them to pull more of their funds from banks, further decreasing the stability of the Greek banks, which makes depositors more concerned, and the cycle continues.

This lack of liquidity isn’t the only reason to leave Greek banks.  The fear of the return of a devalued Greek Drachma could lead many to pull their funds in the more valuable, more stable Euro as quickly as possible.

Greeks, restricted now to a largely cash economy (with limited cash available), will likely fade further into economic recession as the long-term ramifications are sorted out.  The best news here is that Greece is a small part of the European Union’s economy and an incredibly tiny part of the global economy so

What Does This Mean For Your Portfolio?

We are not recommending any structural changes for clients based on this weekend’s events.  
Short Term: There will almost certainly be some snap reactions by markets today.  Even though nobody really knows what the future holds here, you can expect to see some extra volatility in equity markets.  Yields on Greek bonds, already high, will spike further as investors expect future losses.  Yields should also rise on Euro Bonds from other countries as investors ponder what the losses will be for the EU nations.  (Pre-market trading has the S&P and DJIA opening down roughly 0.75% and the yield on the 10 year treasury down 10 basis points).

Long Term: I don’t believe this truly changes any long-term fundamentals.  The biggest risk here is that global growth could be slowed by expectation rather than any real characteristics.

We do believe that growth will be limited in the Euro Zone for the next 18-36 months due to whatever comes after July 21st.  Investors seeking safety will continue to drive down the yield on U. S. Treasuries limiting yields on fixed income instruments in the United States from Money Markets through longer-term bonds.  Of larger concern is whether other troubled EU nations will try to negotiate their own packages based on whatever happens to Greece over the next several months.  If Spain or Italy starts to pursue a similar path then this question will need to be revisited.

What Comes Next for Greece and the Euro?

The Greeks are hoping to get back to the bargaining table as quickly as possible.  Strengthened by the weekend’s vote they will push to get further concessions from their creditors.  (In surprise news this morning, Greek Finance Minister Yanis Varoufakis has resigned, which is either an incredibly cowardly act of somebody who has brought their country to the brink of financial catastrophe, or a pragmatic political act of Prime Minister Tsipras knowing that the needed financing will be somewhat easier to come by with the flamboyant Varoufakis gone.)

To quote the New York Times the question for the European Union comes down to: “…whether they believe the goals of maintaining a united Europe are worth yielding to Greece’s demands: maintaining a spigot of cash (through E.C.B. bank lending programs) and ultimately a new bailout that lets the Greeks write down meaningful debt and relax some of the cuts to pensions and government worker pay of past deals.”

There’s a real line of thinking that the Euro can’t cave to Greece’s demands.  Italy, Ireland, Spain and Portugal would all like some debt relief and easing of their austerity requirements imposed by the ECB.  If Greece gets some concessions, you can be sure that these other member states will all be seeking their own deals.

July 20th is a critical deadline.  On that day Greece must make a payment of 3.5 billion Euros to the ECB.  If that payment is missed then the ECB would have little reason to continue the emergency assistance programs and claim their collateral.  This would cause Greek banks to collapse.  With no central bank support from the ECB, the government would have to create a new currency (ostensibly re-issuing Drachmas) and try to rebuild their financial system.

As always, please let us know if you’d like to have a call or a meeting around this or any other issue that’s concerning you about your financial future.  We’re here, monitoring markets and events, and thinking about you and your families everyday.  

Further Reading/Viewing

Greece’s Banks Are Its Biggest Weakness (WSJ Video)
Now Europe Must Decide Whether to Make an Example of Greece (New York Times)
What’s the timetable to a Grexit? (Wall Street Journal)
Greece debt crisis: Finance Minister Varoufakis resigns (BBC News)
18 key facts about Greece that will leave you totally up to date about a huge crisis (Washington Post)
Greek Business on Life Support (Politico)