Sometimes the soberest, most rational analysis can be replaced with a simple fairy tale. And that is the point we’ve reached in Greece’s on-again / off-again sovereign debt crisis. It’s become a modern-day case of The Boy Who Cried Wolf.
We’ve heard for the better part of five years now that a Greek debt default was imminent and that once it happened, we’d have a Greek exit (“Grexit”) from the Eurozone and a disaster of Biblical proportions, complete with human sacrifice, dogs and cats living together, and mass hysteria, to take a line from Ghostbusters.
Investors stopped reacting to Greek news a long time ago. But what if…just if…it really happens this time?
Greece is running out of money, and in order to secure a full payment of its bailout funds, Greece has to present a credible reform package by Friday.
Sounds easy, right?
Wrong. In order to come up with a credible reform package—which would include committing to the labor reforms made by the previous government, reducing pension benefits and continuing to privatize state assets—the ruling Syriza party would be breaking virtually every promise it made to get elected, which would probably lead to its fall.
We’ll see. Past deadlines have proven to be, shall we say, “flexible.” My bet is that Greece and its creditors agree to a list of ambiguously-worded promises that allow both parties to save face and kick this can a little further down the road. Greece will get whatever minimal lifeline it needs to avoid a default, and we repeat this process ad nauseam.
But what if I’m wrong? What if Friday passes without a deal, positions harden, and Greece pushes forward without bailout aid? Greece has a major IMF payment due on May 12 that it would most likely be unable to pay. This would be a Greek default…and would lump Greece in with some truly elite company. Somalia, Sudan and Zimbabwe are the only countries to ever be late on an IMF payment. A Greek default will almost certainly mean a Grexit, as Greece would be left with no other choice than to print money to pay its bills.
So, let’s say it happens this time. So what? What are the consequences of a Greek default for the average investor?
Let’s look at some scenarios.
- Your U.S. Treasury bonds are likely to get a lot more valuable. ECB President Mario Draghi reiterated last week that the euro “cannot be reversed” and that “there is no going back to the drachma.” Well, that sounds good, but the ECB has reportedly been preparing for a Grexit for months. And given that the market hates uncertainty, you’ll see investors dumping euro assets and flocking to the safety of U.S. Treasury debt.
- Your foreign stock funds will take a hit. I know, I know. You’ve heard the contagion story before. Once Greece goes, investors will assume the worst and dump Spanish and Italian assets in sympathy. I don’t expect any long-lasting effects of contagion. The IMF, ECB and European Commission will make life so difficult for Greece, that Spanish and Italian voters will be scared straight and will shy away from electing their own versions of Syriza. But in the short-term, you can bet it will get dicey.
- U.S. stocks—and particularly those with a large overseas presence—will get knocked around. A recurring theme this earnings season has been that a strong dollar is crimping overseas profits. Any action the ECB takes to stabilize the market—quantitative easing, emerging lending, etc.—will push the euro lower relative to the dollar. So if you think the whining about a strong dollar is bad today, you ain’t seen nothin’ yet.
- Fed tightening will be off the table for a long time, so don’t expect the CD or savings account rates on offer to get better any time soon. Remember, the last thing the Fed wants is a stronger dollar. So if Greece pulls the Eurozone into uncharted territory, expect the Fed to take measures of its own to prevent unwanted dollar strength.
Do I really see any of this happening?
No, I expect Greece to stay in the Eurozone. Syriza realized a long time ago that it really has no cards to play. If it pushes too far, Europe and the IMF will have to make an example out of Greece in order to keep Spain and Italy honest. Think about the misery that Argentina has endured after defaulting a decade ago. U.S. hedge funds went so far as to seize an Argentine navy ship in port in Africa. Do you think that Greece’s official creditors will be any less ruthless if they believe the survival of the Eurozone is at stake?
We’ll see. Until then, the clock is ticking.