Bonds, Currencies, Emerging Markets, Stocks

To Grexit Or Not To Grexit

grexit comicToday, the Greek government has asked for a new bailout program from the European Stability Mechanism (ESM), that’ll cover all the country’s financial needs for the next two years, Bloomberg reported referring to a government statement.

Over the weekend Greece’s Prime Minister Alexis Tsipras announced a referendum for July 5, when Greeks would vote whether to accept the latest proposals from the international creditors.

As Greece appears to be headed for default, its government has ordered the closure of the stock market and banks until at least after July 5. Also capital controls have been put in place to prevent a run on banks.

In the meantime, “index provider MSCI said on Monday that the closure of the Athens stock market and the imposition of capital controls could lead to Greece’s relegation from the benchmark emerging equity index and its reclassification as a “standalone” market,” according to Reuters.

Moreover, Fitch Downgraded Greek Banks to a restricted default (RD) status on capital controls according to the same news agency.

With all that news noise, with definitely a negative bias in favour of a Grexit, investors start panicking while some more sophisticated ones like hedge funds potentially see a buying opportunity.

So where are we? Is Greece leaving the Eurozone a realistic scenario? Timothy Woods, thinks a Grexit has virtually no chance of happening.

I came across Tim’s article today while screening the latest market news and thought it would be a good idea to briefly present his four contrarian reasons against a Grexit scenario which in my opinion make a lot of sense.

1. Merkel says if the euro fails Europe fails

Nobody has a notion what would really happen if Greece left the Eurozone.

Yes, Europe’s banking system is in better shape to withstand another financial disaster or the possibility of a country leaving the monetary union, but in all honesty, Merkel, Draghi, Juncker, Schauble and the rest – none of them have a clue what would really happen to the euro despite their postulations.

2. Polls say 60% of Greeks want an agreement with creditors

The vast majority of Greeks do not want to leave the Eurozone and 60% of them want their country to reach an agreement with the institutions according to official polls.

3. Neither Syriza, Greeks nor the creditors want a Grexit

It’s important to note that the Syriza very much opposed to a Grexit straight from the beginning as nobody wants it. The only people who can decide they want to leave the euro are the Greeks themselves, and they have demonstrated that they want nothing of the sort.

Back in April a source close to the Syriza presented the following view:

We are a left-wing government. If we have to choose between a default to the IMF or a default to our own people, it is a no-brainer,” a senior official told The Telegraph.

So the Greek people have to decide on their own future.

4. Scare tactics have worked throughout history, which is why Claude Juncker is using them

Juncker has implored the Greek people “not to commit suicide for fear of death.” Though he will have annoyed a good many Greeks with his intervention, scare tactics have worked for countless political campaigns and will probably work again.

Tim’s full article you can read by clicking the following link.

So what’s going to happen next?

We will find out the outcome of the referendum vote on the forthcoming Sunday. Whatever the result is, I would like to wish all the best to the Greek people and I firmly believe we should let them decide on their own future. And on the economic side of the equation I don’t believe that austerity works long term. It simply kills growth, people’s dreams, future and plays only and only in the bankers’ favour.  The chart attached below says it all.

Greece vs. Europe

What really Greece needs is a well balanced compromise to give the Greek people hope for a better future reached via mutual compassion, understanding and unity which is supposed to be one of the Eurozone foundation factors.  I am still struggling to understand why IMF is happy to continue lending to Ukraine even after a potential default while at the same time it seems to be harsh towards Greece. I know, it’s geopolitics here but weak and not united Eurozone would only play in Putin’s favour and his expansionary vision of Russia. I know that’s the last thing Europe needs.

About ETFalpha

Chief ETF Strategist & Co-Founder at EMerging Equity

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