A Greek tragedy

This is now officially a Greek tragedy.

In many ways, it is relatively easy to understand why the result was a “No” from Greece. There is little to lose, as a “Yes” to more austerity hardly was a great choice for a society on the brink of a breakdown.

The vote clearly was not helped by the fact that the actual referendum, to vote Yes or No, was confusing. What did they actually say “No” to?

This does not change the fact that I firmly believed Greece would say “yes” and unseat a government that is more interested in their own survival than the country’s destiny. What comes next politically is difficult to predict but markets are slightly easier:

• DAX (German stock index) will open down 5% - again – and probably lose 10% during next few weeks unless European Central Bank and Federal Reserve does a repeat of 2010-11 plunged protection teams.

• The EU’s so-called “Club Med” spreads will rise 20-50 bps over the next few weeks

• Bulgaria, Croatia, Romania should see considerable spread increases

• Predicting the euro against the dollar is a difficult one. I expect a weaker open, but if Greece is actually going to leave the euro then it will be stronger by the end of week. For now I expect 2-5% range the first 24/48 hours (Early Sunday night indication points to: 1.0990/1.1000 (i.e. down 120 pips)

The real risk remains the illiquidity of the market. Do not forget that through government intervention (QE’s) in the bond market there is no two-way market. No market makers and no risk capital (due to capital requirement and regulation).

The big other risk is that banks will NOT re-open despite the assurances by Greek government on Tuesday. Will it lead to 30% haircut on depositors as the Financial Times wrote over the weekend?

The reactions are coming in fast and furious – many gloating and playing games, but where is the long-term solution?
A solution lies in Greece getting a haircut but also make real commitments to redefining a new country. SYRIZA has shown how powerful it is in an environment of “pretend-and-extend” from Europe, but the same “pretend-and-extend” is now dead. The change in macro policies always comes from failings. This is one of the biggest failings in European history.

The Plan A was to do pretend-and-extend. Plan B was to use a “carrot and sticks” approach – and it seems Plan C was not to have a plan at all! Having no plan is not a plan, as is pretty obvious now, but its good news in the sense that someone now needs to own up to the losses incurred alongside no reforms, no structural changes and with no hope.

No winners, only losers

Zero hope, zero reform and zero willingness to change equals a Greece of tomorrow with no access to finance, very little friends and a future which is, if possible, is even more dire.

Europe on the other hand has also lost out. My classic argument since day one has been that the Greek tragedy is one without solutions. No winners, only losers. Europe looks inflexible and stubborn. Clearly we finance people understand and mostly agree with the medicine prescribed, but at all times any policy needs to be embedded in democracy and in the ability of carrying through with the plan.

SYRIZA and Greece however have probably lost out on more. The mere idea they will have come to a new deal in 24 hours is pure fantasy as it has been every week when the now outgoing finance minister promised us a plan by next week.

Like Europe, however they do not have a Plan B or Plan C, only a rhetoric that reminds me of Eastern Europe before 1989.

I love sports analogies as much as most people hate them: This is a now football match being played without referees and rules. Either team can claim to have won: Greece is claiming they made the highest amount of free kicks and three free kicks against them equals a goal for Greece, while the EU and ECB claim that they had more corners than Greece, making them the winners. With no rules and no referees, it’s anybody’s call, but of course, in a regular match these two sides would draw nil-nil.

To show how the two sides continue to ignore how they both have lost here is a few headlines:

This however is what we should be talking about: A Greece that lost it ways and sees no alternative to “revolution.”

And the IMF has opened a new “flank” with a dose of reality.

My conclusive points are:
• The election results have resulted in a surprised consensus .
• Illiquidity is the big risk.
• A Grexit is now a base case.
• There is 25% chance of Europe finding a “geopolitical situation” so important that they extend help to Greece despite harsh words.
• The market will see a 5% drop in equities and 20-50% in fixed income spread expansion. Eastern Europe will hurt more, uncertainty has increased (which the market never likes), Greek banks will most likely remain closed, EUR/USD should drop 2-3 figures at the most.

“Pretend and extend” died tonight, hopefully it will be replaced with a normal business cycle, normal ebbs and flows, but first politicians will try to save face but trying to do just one more round of pretend-and-extend - despite the patient already dying.

_________________
Steen Jakobsen was appointed to the position of Saxo Bank’s Chief Economist in March 2011. Mr. Jakobsen returned to the Bank after two years’ absence. During that time he has been Chief Investment Officer for Limus Capital Partners. Prior to his departure in early 2009, Mr. Jakobsen was with Saxo Bank for almost nine years as Chief Investment Officer. Mr. Jakobsen has more than 20+ years of experience within the fields of proprietary trading and alternative investment. In 1989, after finishing his studies in Economics at Copenhagen University, he started his career at Citibank N.A. Copenhagen from where he moved to Hafnia Merchant Bank as Director, Head of Sales and Options. In 1992, he joined Chase Manhattan in London as VP, Head of Scandinavian Sales, and then the Chase Manhattan Proprietary Trading Group. 1995-1997 he worked as a Proprietary Trader and Head of Flow Desk at Swiss Bank Corp., London. In 1997, he became Global Head of Trading, FX and Options at Christiania (now Nordea) in New York until he joined UBS in New York in 1999 as the Executive Director in the Global Proprietary Trading Group.