Here we go.
The euro has dived, global markets are having a nasty morning, and fear is replacing complacency as the emotion du jour.
It’s the moment we’ve all been waiting for.
Now we get to see just how much Greece really matters.
It’s all about the politics. But the politics are turning toxic
As I’ve said many times during the eurozone crisis, it’s not about economic logic – it’s all about the politics.
The Greek prime minister, Alexis Tsipras, has taken a firm step towards the endgame by putting the “should we stay or should we go?” question to the Greek people.
Greece has called a referendum for this Sunday. (Bear in mind that these plans may be subject to change, like everything else in this situation.) Basically, should Greece accept the conditions of the creditors, or should it reject them?
Now that’s not as clear cut as saying, “should we stay in the eurozone or should we leave?”, but that’s basically what it boils down to.
A ‘yes’ vote would give the government (though maybe Tsipras and his lot would have to resign) the green light to accept austerity measures in exchange for continued eurozone membership.
A ‘no’ vote would give Tsipras the go-ahead to tell the creditors where to stick their demands, which would presumably end in the return of the drachma.
Of course, there’s a whole week to get through before Sunday arrives. And Tsipras’ unilateral decision hasn’t endeared him to the rest of the eurozone.
For a start, Greece has been forced to shut down its banks. There’s a week-long bank holiday in place. You can’t withdraw more than €60 a day from a cash machine. The Athens stock exchange is closed too.
And tomorrow, Greece will default on the €1.5bn it owes the International Monetary Fund (IMF).
Like they say, a week is a long time in politics. Will the Greeks even get to have their referendum?
So far, it looks like the answer is ‘yes’.
The Greek banking system is being kept alive by liquidity from the European Central Bank. So while the bank holiday is needed to prevent a mass run on the banks, they aren’t going to collapse yet.
As Peter Spiegel notes in the FT this morning, “Greece could go into… Sunday’s referendum with banks closed, but without the need to start printing new money”.
And while stiffing the IMF is an achievement that few countries would be proud of, it’s not considered a default by the credit ratings agencies, because it’s not a private lender. Also, if a deal can be reached, the IMF knows it’ll get its money in the end. So its best bet for saving face is to hope for a ‘yes’ vote on Sunday.
Could Greece be Europe’s Lehman Brothers moment after all?
There’s certainly a good chance that the Greeks would vote ‘yes’ on Sunday. Your entire banking system has been shut down. You are effectively being asked whether you want it to be issuing an entirely different currency when it opens back up again. It’s a heck of a leap of faith to vote in favour of that.
Trouble is, getting to that point is dependent on vast reserves of patience that are currently running dry faster than your average Greek bank vault.
Politics in Europe generally is getting ratty. That’s the only way to describe it. And the chances of someone throwing their toys out of the pram before the end of the week have to be rising dramatically.
And that could be much scarier than the markets expect. The reaction of the Americans is particularly telling. Barack Obama was on the phone to German chancellor Angela Merkel, and the US Treasury Secretary, Jack Lew, has urged debt relief for Greece.
I suspect that the US has difficulty grasping the nuances of the whole European political situation. But in this case, you can see why they’re worried. They have experience of what happens when an apparently inconsequential economic cog is allowed to slide into default.
They look at Lehman Brothers and think that they should have bailed it out and saved a lot of heartache. They can’t see why Europe won’t do the same for Greece. They wonder: why are these people even taking the risk?
So could Greece be Europe’s Lehman Brothers? As I’ve said already, the main mechanism is probably not via direct exposure to Greek debt. Instead, the fear is that if Greece goes, the market will turn to the next victim. Given that European unity is being strained already by ‘Brexit’ (and in France, populist Marine le Pen is talking about ‘Frexit’), the promise to do ‘whatever it takes’ to keep things together could be tested to breaking point.
The key is to keep an eye on eurozone area bond yields. That’ll be the first sign that things are fracturing beyond Greece. We’ll be keeping them up to date on our website. As for the investment implications, we’ll have more on that in the next issue of MoneyWeek magazine – if you’re not already a subscriber get your first four issues free here.
• This article is taken from our free daily investment email, Money Morning. Sign up to Money Morning here.