Greece was Off the Front Burner

Greece had been a dominant issue for investors for much of the first seven months of the year.  The apparently reversal by Greek Pm Tsipras allowed Greece to move from the front burner.  China increased to replace Greece as a key issue for investors.  First, it was the slide in the Chinese language share prices, and as shares appeared to stabilize, officials altered the currency regime.

With the German parliament's approval for a third aid package for Greece, and the Dutch approval likely, the Greek saga enters a new phase.  Ancient greek politics, bank recapitalization and implementation will be the new focus.

The official creditors’ demands have split the loose coalition that makes up the Syriza party.  There is much discussion regarding whether Tsipras will call a vote of confidence.  In the event that he does, the left-wing of Syriza will come back into the fold, while the pro-European events, like PASOK and the New Democracy would likely vote to against the government,  which it had supported on the reforms.  The left wing of Syriza may chose instead to make its stand at the party conference next month.  

A key tactical decision is to find least disruptive time to hold brand new elections.  Expect the first review of the implementation of Greece's commitments in October.  That is key not only for freeing up more funds, but also for a more severe discussion about debt relief.  Debt settlement is not only what Syriza has campaigned for, but it is a precondition with regard to IMF involvement.  An election after the review would seem to be the least disruptive and the better for Tsipras, who is still the most popular politician in Greece.  The polls recommend Syriza would likely return to power, however probably in a somewhat broader coalition. 

The ECB will conduct a stress test and review the asset quality of Greece's large banking institutions.  This will help determine the amount of recapitalization funds needed.  The continued contraction within nominal GDP in Greece warns that the loan guide of the banks has likely deteriorated.  Importantly, official lenders have ruled out forcing depositors to deal with any of the cost of the recapitalization.  Senior bondholders are a different story.  The actual details of the recapitalization are not obvious, and it could involve some loan consolidation among the four large banks. 

Skeptics about the Greek program fall under two camps.  The first sees the imposition of austerity as being fundamentally antithetical to growing.  The second views the key problem being that Tspiras isn’t seriously commitment to implementation.  The first camp ultimately may show correct, but their argument is actually moot presently.  Greece's elected reps have accepted the terms.  It is the second issue that is key. 

Lastly, we note that Merkel recommended this week that the refugee problem is prone to become more important (and divisive?) than the Greek economic and financial problems that nearly tore EMU aside.  More refugees entered Greece recently than in the whole of this past year.  Nearly 95% come from Syria, Afghanistan and Irak.  Without addressing this relief issue, it is difficult to see how Greece's is going to find its financial bearings.

What Next For Greece? is actually republished with permission from Marc to Market