Greek referendum – all part of the Varoufakis game

Greece votes a resounding 61% “No” to the Troika debt proposals, yet financial markets remain largely unfazed, with European equity markets declining initially by less than 2% and 10 year bond yields for Italy, Spain and Portugal harden by less than 10bps. With traders having been weaned on a succession of last minute resolutions to avert a crisis (US sub-prime, US debt caps, PIIG’s, to name a few) markets seem to be clutching at the conciliatory comments by Alexis Tsipras and resignation of Yanis Varoufakis together with Angela Merkel’s comments that the Greeks’ decision must “be respected”, whatever that is supposed to mean. But is this a move towards conciliation that is being assumed by markets or an attempt by wily politicians to distance themselves from the impending train-wreck? Should one follow the market conditioning of the past five years and ‘buy the dip’ (//www.youtube.com/watch?v=0akBdQa55b4) or take note of that the economists at both JP Morgan and Barclays working models now assumes ‘Grexit’?

It is looking increasingly obvious that the Troika negotiations have been set up to fail. Greece is bust and has been for years. EU bureaucrats want to hide it, but Tsipras knows this, so does Merkel, the IMF and even my mother. Another so called bailout that merely adds more debt to pay the interest back to the bankers on the last lot and keep the Greek people in debt bondage for another two generations is now no longer a politically viable option. The terms of that last bailout, which saw over 90% of the €240bn package go back to financial institutions rather than the Greeks, has done the Troika no favours in selling its latest ‘deal’. Politically, Merkel cannot concede the principal of debt forgiveness to Greece given the long line of other EU petitioners who will demand the same, particularly now that the ECB has ECJ clearance for QE. Tsipras however can demand no less given his original election mandate and now the referendum. The referendum was less about giving him better legitimacy to negotiate a better deal from Merkel, but a mandate to reject the Troika. Up until a couple of weeks ago, markets were expecting Tsipras to submit to theTroika’s proposals notwithstanding his election mandate. Now, the mandate is explicit in that he is unable to concede. Burning ones ships to ensure no turning back, may not have been an Athenian tactic, but they seem to have learnt from Cortes. With suitable goading from his finance minister and game theoretician, Yanis Varoufakis, the Troika have adopted a hard line in negotiations and a proposal that Tsipras could take back to Athens to get squashed, but from which it will be nigh impossible for either side to substantively retreat from. Varoufakis’s resignation at his moment of victory therefore is not about securing concessions that cannot be made, but to remove himself as factor from the inevitable collapse in negotiations. This has been set up not just to fail, but to leave the Troika taking most of the responsibility for it.

Over the next few days, markets will urge investors to buy the dip, but may have a rude awakening. Some ‘leading’ investment houses were even recommending investors rotate into financials last week and ahead of the referendum, no doubt hoping for a ‘Yes’ vote and citing that the ECB has now relieved most of the banks of their direct Greek bond exposure, although not the unknown derivative tail risk. We are not aware of whether their recommendation has now been revised following the result or whether they are compounding the error by attempting to brazen out the newsflow with hopes that a last minute debt resolution. Either way, these remain dangerous waters to be exposed to financials, particularly amongst the EU peripherals. The first test meanwhile may come as early as next week when a small Japanese (Samurai) bond of approx Yen 20bn matures. Will this be the first credit event and domino?