Friday, 15 June 2012

Preparing for the Greek Election

Greek Election Speculations

The upcoming election in Greece over the weekend has become subject to intense speculation. First a 'secret poll' purported to reveal a lead for New Democracy in Sunday's election (no polling is allowed in Greece in the two weeks leading up to an election). However, political parties conduct their own polls and apparently it was thought politic to leak one:

„At this coming Sunday's elections, the centre-right Nea Dimocratia Party, led by Antonis Samaras and in favour of the Memorandum signed between Athens and its international creditors, should obtain 29% of votes, against 26% due to go to the far-left Syriza party, that intends to re-negotiate the agreements. These figures emerge from a poll carried out in secret by Nea Dimocratia and released in Athens last night.“

This gave the Athens stock market a big boost, with bank stocks taking the lead (these stocks are so beaten down that big percentage gains have become fairly meaningless. When a stock that's down 99% rises by 20%, it is down by 98.8%).

The Athens General Index jumps by over 10% on a leaked 'secret poll' that showed a 3% lead for New Democracy in the upcoming election – click chart for better resolution.

We're not sure how reliable such information is – probably not very – but a case can probably be made for Greek citizens becoming wary of the prospect of a SYRIZA win. However, it seems to us that at this point, the outcome is a coin toss at best.

The ADR of Greek bank NBG jumps by more than 30% (in pre-reverse split terms it has gone from 12 cents to 16 cents….). As of Thursday, the stock is down 97.7% from its late 2007 high. In order for 2007 buyers that have held on to break even, it needs to rise a mere 4,300% in addition to Thursday's gain - click chart for better resolution.

Intervention Rumors Goose Stocks in New York

Then in the afternoon in NY, the stock market was goosed by a rumor that G-20 central banks 'stand ready to provide liquidity' should the Greek election (plus the elections in Egypt and France) result in market turmoil.
Prior to that, the UK chancellor of the exchequer George Osborne and the BoE had already announced that it would pump more money into the UK banking system (more on that in a separate article). A whole range of big-wigs is set to meet on the weekend, with finance ministers holding their own separate conference. An 'emergency meeting' may be held next Tuesday as well, which central bankers will attend from afar 'by phone'.
So just that you know: 'tumultous trading' on Monday is hereby verboten.

„Central banks from major economies stand ready to take steps to stabilize financial markets by providing liquidity and preventing a credit squeeze if the outcome of Greek elections on Sunday causes tumultuous trading, G20 officials told Reuters.
A senior U.S. official cautioned that the Greek election will not provide "the definitive signal on what happens next" in the euro zone debt crisis.
But if severe market strains emerge after an unusual confluence of three elections this weekend – there are important polls in Egypt and France as well – central bankers are on standby to ensure enough cash is flowing through the financial system.
"The central banks are preparing for coordinated action to provide liquidity," said a senior G20 aide familiar with discussions among international financial diplomats. His statement was confirmed by several other G20 officials.
Wall Street stocks jumped sharply on the news, with the S&P 500 and theDow Industrials both up more than 1 percent. The euro added to gains and U.S. government debt prices fell, boosting yields.
Separately on Thursday, British finance minister George Osborne said the government and the Bank of England will act together with new monetary policy tools to tackle tightening credit and financial market conditions triggered by the euro zone crisis.
A move to boost liquidity by central banks could mark a dramatic backdrop to the G20 summit of world leaders, who will gather in Los Cabos, Mexico, on Monday and Tuesday, with Europe's escalating crisis topping the agenda.
Leaders will be accompanied by finance ministers playing an advisory role. The ministers, who usually keep a low profile at these summits, have scheduled a working dinner on Monday and lunch on Tuesday.
Depending on the severity of the market response, an emergency meeting of ministers from the Group of Seven developed nations could be held on Monday or Tuesday in Los Cabos, with central bankers joining by phone, a second G20 official said.

(emphasis added)

The SPX intraday – when the intervention rumor was reported by Reuters, stocks spiked higher - click chart for better resolution.

The market reaction to this rumor is quite amazing, considering the smashing success of all the G-7, G-20, euro-group, etc. meetings and 'emergency summits' that have taken place to date.
Furthermore, given that one must assume that a reason for such intervention will only be provided by a SYRIZA win, will the markets be free to sell off in the event New Democracy wins? Just asking.
As a reminder in this context: regardless of who wins, Greece will be just as bankrupt after the election as it was before it. Not only that, but its administrative paralysis remains as firmly entrenched and daunting as ever.
Here is an article on the Sisyphean task faced by reformers of the system. A graphic we have taken from the article shows the complete chain of command in the upper echelons of the Greek bureaucracy. The effect of this jumbled arrangement is that no significant new policy can actually be implemented, as the directives from various sources keep contradicting each other.

The Greek public policy macaroni chart - click for better resolution.

In this context, Reuters has published an interesting article on how German-Greek relations have deteriorated in the course of the crisis. A few snippets:

„Some Germans also point to the model of the Prussian bureaucrat, whose sense of pride in ensuring decisions taken at the highest levels of government are implemented speedily and to the letter, still runs deep in German ministries. It took a while for Berlin and Brussels to realize that a similar ethos did not exist in Greece. Far from it.
Often Greek civil servants, whose wages and benefits were being slashed to meet austerity goals imposed by Greece's international lenders, actively undermined the ministers they worked for, or operated at cross-purposes with other ministries, with whom they had little or no contact, several German officials said.
Under the guidance of EU and IMF bailout inspectors, the Greek government also made the mistake, the Germans said, of cutting the salaries of civil servants across the board and then later firing a portion of them, when it should have fired first and raised wages for those that remained to keep them motivated.
"They did everything in the wrong order," a senior ministry official in Berlin said. The result was gridlock that often seemed inexplicable to the Germans.
"There is a wonderful tendency in Greece to wait until the last minute to do anything," an EU official, who is a German national, said. "Five minutes before 12 is too early. It has to be 30 seconds before 12 before they step into action."
A confidential wire by the German embassy in Athens warns of "turmoil in the markets" if Tsipras wins and "trouble in the streets" if he doesn't, a senior German official said.
After the experiences of the past year, some euro zone watchers believe Germany will be the first to open the exit door and give Greece a nudge. But that analysis may be too simplistic. The German EU official said regardless of who wins the Greek vote, a new government would be given a final chance.
"There will be a very clear 100-day plan for a new government. If it's not implemented in full, then the game is over," the official said. "This is a very bitter election for the Greek people. They are being asked to support the old guard that got them into this mess."
Others believe the hurdles to an exit are higher. A top European central banker said there was no way to force Greece out of the euro zone if it wanted to stay.
"Europeans can decide to turn off the money taps, in which case Greece defaults by September but it would still stay in the euro," he said.
"There is absolutely no trust in Greek politicians and an awareness that whoever wins, the Greek program will need to be renegotiated after the election. The question is how much Germany is willing to pay to keep Greece in the euro zone. Only Merkel and the politicians can decide that."

(emphasis added)
It is of course quite a legitimate speculation that Germany might be prepared to draw things out even if SYRIZA wins the election. In fact it seems likely – there will be an attempt made to reconcile positions, as quite often election rhetoric and post electoral reality are quite different. Also, there has to be a certain degree of more or less cordial relations even in the event of Greece exiting the euro area. After all, the exit has to be coordinated in some fashion if chaos is to be avoided.
As to the German banker quoted above: there is definitely a way to push Greece out of the euro. All that needs to be done is for the ECB to refuse further provisions of ELA. If then the Bank of Greece continues to credit Greek banks with funds, these funds will by definition no longer be euros.

Financial Markets – the Days Ahead

Lastly, as to how the election will affect financial markets, this remains a coin toss regardless of the result. A big decline in 'risk assets' seems just as likely as a big rally – this simply can not be foreseen with any certainty. Perhaps it will actually turn out to be a big yawn in the end, given how nervous everybody seems to be about it.  
We have frequently pointed out how large the speculator net short position in euro futures has become, but now this position has been joined by another extreme in speculator positioning against the Australian dollar. This is a bet on the economic slowdown in China intensifying and hence more rate cuts coming from the RBA. While we believe this is the correct bet in the medium term, the extreme in the current positioning data gives us pause – especially as no technical breakdown is in evidence just yet:

Commitments of traders in the Australian dollar: another currency futures record net short position by speculators (via - click chart for better resolution.

Obviously, extremes in the speculative net position have created turning points in the past. This would actually argue in favor a short term rally in 'risk assets'.
The other side of the coin – not relevant in the short term, but certainly in the medium to longer term -  is the cash to assets ratio of mutual funds, which sits a mere 10 basis points above a record low:

Mutual fund cash relative to assets: at 3.4% it is almost at a record low. The absolute record low was registered last month at 3.3% (this measure exists since the 1950's, and yes, it hasnever been lower) - click chart for better resolution.

Charts by:, Panagiotis Karkatsoulis,,

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