Independent Strategy On "Greece The Ungovernable" - "Go short the euro and PIIGS debt — and hold on to your seats!"

Must read update on Greece from Independent Strategy

Greece the ungovernable

  • The Greek PM's call for a referendum on the bailout package reveals that Greece is becoming increasingly ungovernable under the weight of fiscal austerity and recession.
  • Expect weeks of uncertainty in markets and rising contagion in other weaker EMU states. If the vote is lost, Greece will default. Stay short the euro and PIGS debt.

The decision by Greek PM Papandreou to call for a referendum on the latest Greek bailout deal shows that Greece is becoming ungovernable. The PASOK leader made this decision because riots in the streets, increasing refusal by civil servants to implement the austerity measures and the likely loss of his majority in parliament made the survival of the government unlikely within weeks or months.

So Papandreou has gone for broke. He hopes that by winning a vote on the bailout plan he can shut up the opposition both in parliament and on the streets. But this high-risk strategy threatens to bring the whole house of Euro cards down.

At best, we face two months of uncertainty before the vote. The Greek parliament must approve the call for a referendum and the President must agree. And then it depends on how the referendum question is worded. If it is ‘do you want to accept the latest bail out plan’ then the answer will be a resounding no. If they word it so it says ‘do you wish to remain in the Euro zone’ then the answer will be a resounding yes.

At worst, Greece may not even make it to mid- January before there is a disorderly default. Parliament could defeat a vote of confidence in the government on Friday and Greece would be plunged into elections, with the opposition likely to win on a programme of ‘renegotiating’ the bailout plan so tortuously agreed with the Euro leaders.

Also the latest tranche of official funding from the EU and the IMF under the old Greek bailout plan could be frozen if the government falls. Under IMF rules, it cannot disburse a tranche if there is no government. The EU would have to step up to the plate and provide all the funding until the election or referendum is over. Without this money, Greece would be bankrupt.

And just imagine if Greece heads into two months of a referendum campaign with riots and demonstrations in the streets. A run on Greek banks — Argentina-style — would become very likely. It’s true that the rich and many corporations have already moved their euros abroad, but the populace at large would soon be running to get their euros under mattresses fast if they thought that Greece was set to default and leave the euro.

The Greek public debt ratio may be heading towards 180% of GDP next year without the bailout plan, but if Greece leaves the Eurozone with a no-vote in the referendum, a New Drachma devalued by 50% or more would double that debt ratio.

The optimistic scenario is that the Greek parliament backs the government and a referendum campaign is conducted on ‘staying in the euro’,  which is won. The Eurozone and the IMF continue to finance the Greeks over the next two months before the new bailout package takes over. The 50% haircut for the banks on their holdings of Greek debt goes through with over 90% involvement; the banks receive funds to  recapitalise; and the EFSF is enhanced with new firepower to inoculate Portugal, Spain and Italy from the Greek nightmare. And the G20 meeting comes through with new measures of funding to help Europe.

The more you think about, the less likely that sounds. More likely, the uncertainty will undermine the efficacy of enhancing the EFSF through adequate funding from a Special Purpose Vehicle. It will increase contagion for Italy and Spain, increasing the cost of ring-fencing. And a  disorderly default would trigger losses for the ECB itself on its holdings of Greek debt.

Go short the euro and PIIGS debt — and hold on to your seats!


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