Tags: greece | investing | europe | dollars

My Greek Philosophy? Hope for the Best, Be Prepared for the Worst

Tuesday, 27 January 2015 02:29 PM Current | Bio | Archive

This week we will know if the FOMC remains what it calls itself “patient” and still finds reasons not to start normalizing its financial policy with close to zero interest rates or instead gives us a first sign it is finally closing in to start rising rates, which I think it won’t, but it can’t be excluded, either.

Anyway, as always, as an investor you should always be prepared for the unexpected to happen.

That said, on Monday it was really interesting to see how markets apparently digested rather well the election results (as expected) in Greece where we witnessed an “extreme-left” government come to power inside the eurozone under the leadership of the 40-year old Alexis Tsipras, who as a student began de facto his political career by joining the “Young Communists Society” in the 1980s.

Long-term investors could do well taking notice of his political roots that took hold in an environment that was inspired by the communist doctrine. By the way, in his country he is also described as the “Greek Che Guevara.”

Tsipras also calls himself a hard realist who doesn’t exclude compromise. We’ll see if he, by trying to get better conditions for his country’s obligations, will be disposed to compromise on Greece’s debt and on the bailout conditions that were imposed on Greece now the elections are over.

We also got confirmation the new Greek Finance Minister will be political economist Yanis Varoufakis, who called himself in December 2013 an “erratic Marxist” in an opinion piece wherein he wrote among a boatload of politically important views: “… Europe’s elites are behaving today like a hapless cast of clueless leaders who understand neither the nature of the crisis that they are presiding over nor its implications for their own fate – let alone for the future of European civilization … When addressing diverse audiences ranging from radical activists to hedge fund managers, the idea is to forge strategic alliances even with right-wingers with whom we share a simple interest: an interest to end the negative feedback loop between austerity and crisis, between bankrupt states and bankrupt backs; a negative feedback effect that undermines both capitalism and any progressive program for replacing it.”

Now, in the near term the new Greek government faces two important debt repayments with 4.3 billion euros ($4.89 billion) in March and 6 billion euros ($6.82 billion) in August and when we add due interests the country faces a payment that equals to about 10 percent of its present GDP.

You don’t need to have a lot of imagination to understand that without help Greece faces a nearly impossible task and without help it would have little other choice than to default on its debt.

So, the question is will it come to a standoff between Greece and the so-called “troika” of the European Commission, the European Central Bank and the International Monetary Fund Troika, yes or no?

And if all that wasn’t enough, in the meantime the Greek banks have been facing important outflows in the run up to the elections and therefore remain heavily dependent on their Emergency Liquidity Agreement with the Bank of Greece that was approved by the ECB and that amounts to about 50 billion euros.

Today, nobody has the answers to all that, let alone what it all implies for Greece and the eurozone as a whole.

Yes, this is again high uncertainty all over the place, notwithstanding we shouldn’t have to wait that long to get a first clue where we could be headed from here once it will become clear if Greece has intentions in some way or another to compromise and tries to find a doable way to honor its debt obligations albeit under better conditions for Greece than as has been agreed on beforehand.

If that would be the case, which is I must admit is today very close to wishful thinking, the EZ and the Troika as a whole would have it much easier to help and to rollover Greece’s debt, most probably by extending the maturities, which would in fact be a “de facto” haircut, notwithstanding the Troika formally refutes to allow another Greek haircut.

Of course, we aren’t there yet.

In a just released report, Moody’s from its side says the Greek election outcome is “Credit Negative because it prolongs financing, liquidity and economic growth risks.”

No wonder, with all that rising uncertainty and now we know who will occupy the key posts in the new Greek government, Greek banks’ prices fell to historical lows while the 3-year Greece sovereign jumped to a high of 13.81 percent, which was up 178 basis points and the10-year hit 9.73 percent, which was up 50 basis points.

I’m sorry, but I think there is little chance to err when as an investor you remain as realistic as possible and consider in your assumptions the new Greek government and the Troika could be on their way to a showdown, which, and if that would be the case we could be at the dawn of a new political crisis in the eurozone (EZ).

In this context and over the weekend Bundesbank President Jens Weidmann told at the German public broadcaster ARD: “I believe it’s ... in the interest of the Greek government to do what is necessary to tackle the structural problems there ... I hope the new government won’t call into question what is expected and what has already been achieved.”

Adding when asked about the possibility of a third haircut for Greece, he said: “For me it’s decisive that Greek public finances are stable in the long term and as long as that’s not the case, a haircut would only grant a short pause for breath.” In simple words, there is little room for compromise so far, but all the doors aren’t closed either.

Besides all that, last week in Davos, Switzerland, at the World Economic Forum, Bank of England Governor Mark Carney has warned diverging monetary policies in the U.S., Britain, Europe, and Japan may set off further currency turbulence and “test capital flows across the global economy, including to emerging markets.”

Believe me, this is extremely important as there is a widespread false perception there is liquidity in the markets. No, there isn't and, according to Mr. Carney, there are $9 trillion out there in the markets that are considered as being liquid while they aren't. We could say, the Governor of the Bank of England has warned us...

As always, hope for the best, but be prepared for the worst. If I’d be invested in dollars, I’d stay in dollars, but as liquid as possible. That by itself could become extremely important when the next financial storm breaks loose, which is of course not for sure.

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As always, hope for the best, but be prepared for the worst. If I’d be invested in dollars, I’d stay in dollars, but as liquid as possible. That by itself could become extremely important when the next financial storm breaks loose, which is of course not for sure.
greece, investing, europe, dollars
Tuesday, 27 January 2015 02:29 PM
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