What's At Stake If Greece Leaves Eurozone

Greece is putting to a vote Sunday whether the country should abide by the European Central Bank’s and the International Monetary Fund’s demands in order to get additional funding it needs to honour debt payments. At heart, the vote is on austerity measures, but a “no” would put Greece on its path to exit the Eurozone, according to geopolitical think tank Stratfor.

Over the weekend, when negotiations between Greece and its lenders broke down, people in Greece rushed to ATMs to take out as many euros as they could, adding to “billions of euros in capital flight since the beginning of the year,” Stratfor said.

“Even if the Greek government plans to continue negotiating with its creditors, the referendum creates significant uncertainty in Greece and capital controls will be difficult to avoid,” Stratfor said in a research note Monday, noting that the upcoming referendum could mark the beginning of Greece's exit from the Eurozone.

How that exit takes shape—if it happens—is still unclear, but economists and market experts are already weighing in. Here are excerpts from two views shared in blog posts this week on what’s at stake:

Steen Jakobsen, CIO at Saxo Bank, says: “My advice of taking a six-month holiday from markets unfortunately looks like good counsel”.

There is exactly the same feeling into the air as before the Lehman default. I remember being almost alone in thinking Lehman would fail to remain afloat, but both the market and the Federal Reserve kept seeing last-minute solutions.

The decision is similar. Lehman was perceived as being too "difficult" to save; actually, very few people wanted to help them and don't forget Lehman paid a significant premium for funding +100/200 bps in one-week deposits way before 2008...

Lehman was leveraged 30/35x on its balance sheet, and the Greek debt was/is similarly exposed.

The "morale" risk is also similar and it comes from the macroprudential framework of always trying to buy more time..... which never works.

The Fed's plan (regarding Lehman Brothers) was to buy more time as plan A and plan B were "carrot and stick"-type solutions. When these blew up, plan C was panic... and no plan. Lehman didn’t have a plan, neither does Greece. Having no plan is not a plan, as we are witnessing.

We have difficulty dealing with non-linear movements in markets, hence the hope and belief. But again, let me stress that the biggest risk is bloated VaR (value at risk and correlations going to...). This will produce unintended consequences like the Bulgaria and Romanian bond routs yesterday, Puerto Rico's likely default, and a higher euro.

The market is chasing "good hedges", which don’t exist. Trust me: as someone who ran risk and trading through 1992, 1997-1998, 2000, 2008 and 2010/14, there aren't any good hedges – there is only not having the bad positions in the first place when everything goes to a correlation of one

The failure to secure a last-minute deal should see the Dax head down another 3-5% and will explode credit risk to new Eurozone members like Hungary, Croatia, Bulgaria, and Romania... even Poland should feel headwinds.

My advice of taking a six-month holiday from markets unfortunately looks like good counsel.

From where I sit in Shanghai, the market here is nervous ahead of opening... we are down 22% from the 2015 peak!

[…] Are you beginning to understand why I disapprove of macro and politicians?

John Stepek, editor of MoneyWeek magazine, warns investors to keep an eye on Eurozone bond yields for signs of trouble.

There’s certainly a good chance that the Greeks would vote ‘yes’ on Sunday. Your entire banking system has been shut down. You are effectively being asked whether you want it to be issuing an entirely different currency when it opens back up again. It’s a heck of a leap of faith to vote in favour of that. 

Trouble is, getting to that point is dependent on vast reserves of patience that are currently running dry faster than your average Greek bank vault. 

Politics in Europe generally is getting ratty. That’s the only way to describe it. And the chances of someone throwing their toys out of the pram before the end of the week have to be rising dramatically. 

And that could be much scarier than the markets expect. The reaction of the Americans is particularly telling. Barack Obama was on the phone to German chancellor Angela Merkel, and the US Treasury Secretary, Jack Lew, has urged debt relief for Greece. 

I suspect that the US has difficulty grasping the nuances of the whole European political situation. But in this case, you can see why they’re worried. They have experience of what happens when an apparently inconsequential economic cog is allowed to slide into default. 

They look at Lehman Brothers and think that they should have bailed it out and saved a lot of heartache. They can’t see why Europe won’t do the same for Greece. They wonder: why are these people even taking the risk?

So could Greece be Europe’s Lehman Brothers? As I’ve said already, the main mechanism is probably not via direct exposure to Greek debt. Instead, the fear is that if Greece goes, the market will turn to the next victim. Given that European unity is being strained already by ‘Brexit’ (and in France, populist Marine le Pen is talking about ‘Frexit’), the promise to do ‘whatever it takes’ to keep things together could be tested to breaking point.

The key is to keep an eye on Eurozone area bond yields. That’ll be the first sign that things are fracturing beyond Greece.