23rd June 2015
Psigma’s chief investment officer Tom Becket gives his view on the tough choices facing Greece and its creditors no matter what happens this week.
Over the last two weeks a reassuringly healthy number of contacts were hustled by our sales and marketing team to hear our latest views on markets and the economy. Many thanks again to those of you who put up with me. Amongst the volley of excellent questions, two subjects stood out; Grexit and Brexit. As you can imagine, I often get questions that leave me scratching my head, but certainly the answers of whether Greece and Britain will leave the Eurozone are almost impossible to answer. Moreover the implications are also very hard to read and state for certain, but in the next few weeks I will give our ‘best guess’ on both subjects.
We’ll start today with our cash-strapped pals on the Ionian Pensinsula. We feel that whether they get their hands on a few more Euros by the end of June (when the next major IMF repayment is due) is a moot point. A few notes here and there is frankly not the solution that Greece needs. The only decisive way forward for the increasingly-friendless nation is default or debt forgiveness, or a combination of the two. There doesn’t seem any logical way that the Greeks can pay their dues, stay in Europe and keep the population happy. Comrade Tsipras may be playing a dangerous game and at times acting irresponsibly, but I guess that he knows the equation doesn’t add up and neither he nor the Greeks seem willing to take the harsh medicine that the Irish did late last decade. Interestingly having just returned from the worst football match in history in the Emerald Isle I can testify that Ireland’s grim situation has been ameliorated beyond expectation. Contrary to tradition this was not down to the luck of the Irish but seriously painful measures that seem unpalatable to the Greek nation.
It remains to be seen whether the latest ‘Greece-saving’ deal gets done this week to release a few more Euros to the Aegean sea; our view, shared by the market is that it will be sorted at the latest festival of hot air on Thursday (boy do those bigwigs love racking up airmiles). More important though is our prediction that, despite some notable Greek cash-saving efforts suggested this week (such as finally taxing rich people), this will merely be another boot of the can down the road and behind the scenes all will be preparing for the eventual Grexit. As I have already said, unless there is a significant line drawn by their creditors through much of Greece’s outstanding IOUs then this will like prove a wasted effort and we will be re-opening old wounds soon.
What do these ‘best guess’ predictions mean for markets? If we’re right (and we’re far from certain), there will probably be another sigh of relief that began on Monday which allows both European equities and credit spreads to rally. However ultimately the Greek tragedy will have to come to its close. That reality should not detract from the fact that Euro assets are still good value. On the flip side, were Merkel and co to tell the Greeks to ‘do one’, we believe that markets would take it badly initially. Forget that fact that Greece is a mere 2% of European GDP and most Greek debt is no longer in private hands, it is basically impossible to say what any contagion effects might be. However, we actually feel that the remedies proposed after a Grexit could be so potent that any Graccident could be a cathartic event that would allow investors, many of whom missed le bateau, to buy long term recovery themes in European markets. Indeed, the recent sell-off could be considered healthy after the breakneck speed of the rise in European markets this year.
In short, we stay with finger-nails short, holding our long-term favoured positions in Europe and spend long nights waiting for the next dose of European political chaos. Greece stays for now, but goes eventually and I write many more blogs on this subject in the future. Now there’s something to look forward to…
Chief Investment Officer