Daniel Lacalle

Greece Votes ‘No’. Risk On The Rise

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 “Born to raise hell, we know how to do it and we do it real well”-Motorhead

 The referendum in Greece ended with a win of the “no” against the proposals of the European Union.

But this is not the end. It’s the beginning.

 For once, Greece’s prime minister Tsipras’ belief that this result will provide the country with more strength to negotiate was and is incorrect. If anything, the result brings the country one step closer to full intervention. Why?

 As time passes, Greece is suffering not only from lack of funds to pay for public services and pensions, but its main industry, tourism, is also suffering, with a loss of more than 50,000 visitors in a week.

 Greek banks are already requesting further liquidity from the ECB. It is not clear that support will remain indefinitely.

 Greece is also facing bankrupcies in the private sector, where most companies are small shops and SMEs suffering from complete lack of credit.

 Yes, as we explained last week in our call, this has been a political move, not one looking for the best financial deal.

 Syriza has turned a problem of financing and liquidity into one of a possible failed state close to being intervened. While the Greek TV clings on to the “greater fool” theory of a possible Russian or Chinese aid, this has failed to materialize. Not only China and Russia face their own internal issues, but they are unlikely to come to the rescue of a country that sets lack of commitment to creditors at its core.

 So, what now?

 Don’t expect a quick solution. The EU is unlikely to bow down ahead of a large maturity in August.

 Additionally, Greece’s vote is likely to cause shockwaves throughout Europe as we mentioned in last week’s call, with fringe parties making this vote a validation of their own aspirations.

 More importantly, so far we have only seen the reaction of the ones that receive… Let’s wait for the answer of the ones that pay. The UK vote is coming soon, and it is unlikely that German, Finnish or Dutch citizens will feel happy to see their taxes raised to maintain Greece’s public spending and generous pensions.

 Greece’s demands are simply impossible to grant. And what is most important is that, no matter what happens on a political level, investment and job creation will suffer after the country puts the word “uninvestable” at the door. Greeks are facing a prolongued period of recession and the very likely implementation of much harsher cuts than what they have voted against as the country moves to default and institutional implosion.

For investors there is a very relevant fact to remember. The monetary bazooka of the ECB cannot contain the perception of risk throughout other countries if the EU allows the victory of the message that default and lack of commitment is feasible. This is why the IMF and EU’s response has to be one of strength, or face slow implosion.
 Low growth, lack of investment and poor job creation remain the central scenario. In the next months we have to add financial stability and the euro as a sustainable currency to the picture…again.

 The referendum is not the end of the Greek drama. It is the beginning of the real drama.


-Daniel Lacalle

About the Author

Daniel Lacalle is an economist and fund manager, and author of ‘Life In The Financial Markets’ and ‘The Energy World Is Flat’ (Wiley).

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