Over the last three years, I’ve written countless articles about Greece.
They usually begin by noting that Greece is essentially bankrupt unless Europe (specifically Germany) is willing to write off most of its debts – which it is not.
I then note that leaving the euro would make the Greek economy competitive again in a much shorter timeframe than the ‘internal devaluation’ strategy.
It would also greatly boost Greek stocks in the medium term, after the initial fallout.
In short, a ‘Grexit’ could actually be the best solution – for Greece, certainly.
So are we any closer to this actually happening? I think it could be any day now.
Greece is running out of money and time
Why hasn’t Greece left the eurozone yet? It boils down to fear.
The Greeks fear a return to the drachma. Germany and the rest of the eurozone worries about the impact of a Greek exit on both the wider European project in general and its banks specifically.
However, it looks like the day of reckoning is finally near. Greece is only days from defaulting. The immediate problem is that it hasn’t got any money left to meet the demands of its creditors. The Greek finance minister reckons it won’t be able to make a payment to the International Monetary Fund (IMF), that’s due a week on Friday (5 June).
Greek prime minister Alexis Tsipras insists that a deal that would give his country some breathing space for a few more months is close. However, other reports suggest the two sides are still far apart.
The key problem is that Europe and the IMF want Greece to carry on with a previously-agreed programme of spending cuts, labour market reforms and tax rises. In contrast, Athens is rejecting any further changes to pensions, taxes or reforms in general.
In fact, pressure is building for the Greek government to take an even tougher stance. Tsipras recently only narrowly defeated a revolt from within his own party that would have had him refusing to make any concessions at all.
This presents him with a dilemma: if he doesn’t make concessions, he won’t get any cash. But if he does, he could end up out of office.
A vote won’t solve anything
Several solutions have been pitched to try to bridge this chasm. One solution is for any deal to be put to a national vote. The idea is that this would force the Greek people to commit to it wholeheartedly.
The idea has some interesting supporters. German and French pressure forced the previous Greek prime minister to withdraw his promise of a vote in November 2011. But now the German finance minister, Wolfgang Schaeuble, supports it (or at least says he does).
Another solution, proposed by Hugo Dixon of Reuters, is for Tsipras to call a new election, seeking an explicit mandate to carry out further austerity measures. Dixon argues that this would also allow him to throw out members of his own party who oppose a deal.
However, this would all take time to organise. And both sides would need to agree a deal to present to the voters in the first place (otherwise the Greeks could claim that they hadn’t agreed to anything concrete). Given the divisions that still exist between Athens and Brussels, this isn’t a given.
But perhaps the biggest problem is that Brussels can’t assume that the Greeks are willing to accept austerity as the price for staying in the euro. A recent poll showed that two thirds of the population wanted to keep the euro. However, this fell to less than 55% when asked to make further reforms.
On top of that, the fact that Germany seems happy for the Greeks to have a vote hints that it’s no longer as afraid of a Greek exit as it once was. Many senior figures in the German government now reportedly think that Greece could safely go.
And after losing the argument over quantitative easing at the start of the year, there is pressure on Germany to draw a line in the sand. Particularly as the latest polls in March show that 80% of Germans think Greece is taking the rest of Europe for a ride. Indeed, a majority of them now want Greece to be thrown out.
Markets in general are more relaxed about the prospect. Even Warren Buffett has argued that any short-term turmoil would be compensated by the message about fiscal discipline that kicking Greece out would send.
It’s decision time
Of course, while a Greek exit is much more likely than it was a few weeks ago, there’s still a chance that it could be resolved. Angela Merkel could still try to sell a long-term deal to the German people on the grounds of ‘regional security’. The US is also reportedly trying to prevent a Greek exit on similar grounds.
However, what is different this time is that the ‘kick the can down the road and hope for the best’ manoeuvre won’t work anymore – a deal needs to be made, and soon.
Either Germany and Brussels agree to huge haircuts on their holdings of Greek debt, and an end to austerity – or Greece will default and leave. Both of these options are better for Greek shares than the current status quo (though my guess is that the second is the best solution).
If you’re feeling very bold indeed you could buy into the Greek market through the Lyxor FTSE Athex 20 ETF (Paris: GRE). There’s always the concern of potential capital controls and the chaos that might follow a redenomination, but in the longer run Greece is so cheap that it’s more than priced in. Or you could at least put it on your watch-list and wait until things have played out further and there’s more clarity.
Alternatively, our regular contributor Jonathan Compton wrote about the best ways to play the eurozone in a recent issue of MoneyWeek magazine. If you’re not already a subscriber, pick up your first four issues free.
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