Tags: Grexit | referendum | investing | volatility

Grexit Could Be Volatile Buying Opportunity for Investors

By    |   Monday, 06 July 2015 06:16 AM

Intriguingly, the euro traded lower after a Greek referendum produced a "no" vote on austerity measures, whereas one would think that if the market actually expected Greece to depart, the euro should have strengthened. CNBC’s Adam Bakhtiar predicted that the result “will ripple across global markets” and affect all asset classes, as the Greeks “are pushing back against their foreign creditors.” Bakhtiar focused on “the unfunded off-balance-sheet guarantees that the European governments have committed to.” He also noted that with so much attention on Greece, Chinese authorities have been meeting and taking emergency measures to deal with a 30 percent crash in the Shanghai stock market over the last three weeks. One wonders where the U.S. Treasury and Fed might be in all of this, especially with IMF Managing Director Christine Lagarde warning about the danger of write-downs and fire sales of financial assets.

Next, David Campbell Bannerman, a conservative member of the European Parliament, joins the many commentators who have said that while a Grexit would be messy, or as Bannerman put it, “bloody,” this would be the best outcome for the economy. He also praises the result for discouraging the eurocrats in Brussels from trying to replace the democratic government of Greece with a technocratic regime. Asked whether other countries would also demand relief, Bannerman responded, “I think some reality has to come in. Greece cannot repay this order of debts, 330 billion euros, depending on how you look at it; it’s just not possible.” He called for Greece’s debts to be “wiped, a radical solution to start Greece growing again,” and added, “I personally think Greece would be better off leaving the euro, re-creating the drachma,” to encourage tourism and investment in Greece. This writer would point out that such a result would call into question the legitimacy of the international financial arrangements that have allowed Greece and bankers to get to this point, and Treasury Secretary Jack Lew might be asked about this in forthcoming Senate testimony.

Steve Keen, chief economist for IDEA, suggested that the strong no vote provides a mandate for the Greek government “to play hardball” with the EU. He criticized the EU for saying repeatedly that it is compromising, without actually doing so one iota. He cited a research paper from the IMF itself calling for debt relief. In response to a panelist’s question as to what the message is for frugal Germans, Keen said, in effect, that it serves them right, because they don’t understand the monetary system they’ve built “by creating a one-winged airplane called the euro,” which has created a crisis in private debt that requires a “reset” of that sector. He urged a write-down of 50% of Greek government debt, and other panelists criticized the system of debt guarantees that creates, if effect, moral hazard on the part of lenders and borrowers.

Finally, Will Oswald, of Standard Chartered, boldly predicts that the ECB will not cut off support for Greece, saying, as it did in 2012, that the decision is a political one “versus the economic reality,” and not for the ECB to make. He agreed with the interviewer that this implies expanded QE by the ECB. He agreed that an outright default would have a contagion effect as governments would be required to make good on debt guarantees, and he questioned how the debt markets would respond to this. Oswald concluded that this is bullish for Treasurys and for volatility, which this writer would say means a further reward for those who bought the VIX when it was in the low teens.

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Intriguingly, the euro traded lower after a Greek referendum produced a "no" vote on austerity measures, whereas one would think that if the market actually expected Greece to depart, the euro should have strengthened.
Grexit, referendum, investing, volatility
Monday, 06 July 2015 06:16 AM
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