I’ve written on the Greek drama quite a bit recently, as this crisis has been needlessly dragged out and now appears to be heading for a disorderly eruption, the extent of which Europe’s leaders may be underestimating. The decision by the Greek Prime Minister Alexis Tsparis to announce a “bailout referendum” for July 5th, to let the Greek people decide on whether to accept the offer from international creditors, has further complicated an already messy situation. Germany’s Angela Merkel told reporters on Friday that the Greek government should accept their “very generous” offer. Now it is in the hands of the Greek people, who are more likely to vote “No thanks”.
Over the weekend, pressure mounted ahead of the current bailout expiring on Tuesday without a new deal, as well as the outstanding payment of €1.6 billion due to the IMF the same day. A request for a short term extension of the current programme was rejected, forcing the ECB to limit the liquidity available to Greek banks, which “forced the Greek central bank to suggest a bank holiday and restrictions on bank withdrawals”, according to Tsparis. The Greek banks and the stock market will not open Monday, and will remain closed for the rest of the week.
The hubris among foreign investors last week that a deal would be reached, despite clear signs of a gulf between both sides, looks severely misguided now. Even as bank deposits flowed out of Greece, speculative inflows pushed the Athens Stock Exchange Composite index up 17% last week. The Greek 2-year bond yield fell c. 900bps to 20.62%, albeit a long way from the 3.384% yield in July 2014 when the bond was first issued. Investors who bought those bonds less than a year ago have certainly learned the risk of reaching for yield!
In a speech in St. Petersburg, Russia, on June 19th, the Greek Prime Minister said “We are in the midst of great turbulence. But we are a nation of seafarers, who know how to deal with storms, and aren’t afraid to sail to distant oceans, to uncharted waters, in search of a safe harbour.” However, Tsparis and his government now look stranded at sea, with his European peers increasingly unwilling to answer his SOS calls!