Markets & Economy

Special Bulletin on Greece

Special Bulletin on Greece
July 1, 2015

Are you thinking, “It Is All Greek to Me” ?

  • History may not always repeat itself, but it does often rhyme. From 407 BC to 367, the Greek city state of Syracuse was ruled by Dionysius the Elder. After accumulating huge debts to pay for military campaigns, extravagant living arrangements, and generous entertainment for the common people, the city state found it was drastically short of available funds. With insufficient tax revenue and no more willing lenders, something had to be done. Under penalty of death, Dionysius commanded his citizens to turn over all their drachmas. Once they were collected, he simply re-marked each one drachma coin to its new value of two drachmas. And just like that, prosperity presumably had returned. Except, of course, this was nothing but an illusion, and no new fortune had been created.
  • Greece finds itself today in a similar situation, deep in debt and lacking the means to pay it back. Unfortunately, now its liabilities are denominated in a common currency, the Euro, ruling out instantaneous devaluation as a possible “solution”, at least as long as it remains part of the Eurozone.
  • While this Greek tragedy has been years in the making, with a final outcome that remains uncertain, the consequences beyond Greece’s borders appear to be contained in the near term.

What’s the latest?

  • Over the weekend, Greece’s Syriza party, led by Prime Minister Alexis Tsipras, did not reach an agreement with its creditors (mainly the IMF, ECB, and EU) on an extension of its bailout package
  • Greece yesterday missed its debt payment due to the IMF on June 30th, and bailout financing from the European Financial Stability Facility (EFSF) expired.
  • Emergency Liquidity Assistance (ELA), the program keeping Greek banks solvent as capital was being withdrawn, is being removed.
  • This necessitates the implementation of capital controls, limiting the amount of money citizens can withdrawal. For a cash economy like Greece, this is particularly painful to the locals.

What’s next?

  • Greek PM Tsipras has called a referendum vote on July 5th on the bailout proposal submitted from the IMF, EU, and ECB. A “yes” vote approves the proposal, while a “no” vote disapproves. The latest polling suggests a majority will vote yes, but this is far from certain. The prevailing thought is that a yes vote is a vote by Greek citizens to remain in the Euro.
  • Tsipras is campaigning for a “no” vote, believing it strengthens his bargaining power with the ECB and other authorities who he believes do not want Greece to exit the EU. The EU, on the other hand, has made comments suggesting that a Greek exit would not be a big deal for the EU.
  • A “no” vote therefore increases the likelihood of a Greek exit, but that outcome is far from certain.

Is this a Lehman-type moment; what will the effect on the U.S. be?

  • We don’t consider this to be a Lehman-type moment; the Greek economy is small not just on a global scale, but also relative to Europe on a stand-alone basis. The value of all Greek equities held by U.S. investors has a total market value less than the market value of Dunkin Donuts – a bit more than $5 billion.
  • Most of Greece’s debt is now held by public institutions, rather than private parties, such as banks, which should limit possible contagion and a domino effect.
  • As it pertains to the U.S., any effects are likely minimal; Greece is not near big enough or prominent enough in the global economy to derail any momentum in the U.S. economy.
  • U.S. exports to Greece are less than $1 billion, representing mere fractions of a percent of GDP.
  • U.S. growth domestically is picking up after a sluggish first quarter, especially the housing sector, increased consumer spending, and rising consumer confidence.
  • It is also possible that the Fed, which keenly watches global economic developments, may favor pushing back any planned interest rate hike as a risk management measure in response to some negative fallout from the Greek situation.