Greece Hold’em – Calling Papandreou’s Bluff
Note: Texas Hold'em is a high-stakes poker match consisting of five shared cards dealt on the table, the first three called "the flop", the fourth referred to as "the turn", and the fifth as "the river". With each consecutive move, as the stakes increase, a number of players are often eliminated along the way.
As most of our readers are well aware by now, Papandreou shocked the markets on Monday, at about 2:00 p.m. EST, by announcing plans to hold a confidence vote and a subsequent referendum on the Eurozone debt deal as a last resort to build support within his government. (Trying to pass the buck, huh?) The reason for the dodge: further austerity measures would likely result in more social chaos in Greece. The uncertainty rippled through financial markets this week. Papandreou thought he’d play his hand in the Greek bailout politics but later in the week, his bluff was called.
Wednesday, Papandreou took a step back by announcing there wouldn’t need to be a referendum if a consensus was built between his party and the opposition; however, the move had already caused large rifts even within his own party. Elena Panariti, an adviser to Papandreou had said, “I won’t give a vote of confidence to a path of catastrophe for my country” which was in reference to a referendum of possibly leaving the EU and the euro. Additionally, EU leaders made it very clear that a “no” vote on the bailout agreement last week would mean default and the first member to leave the euro.
On Thursday, Papandreou took a second step back by seeking an accord with New Democracy leader, Antonis Samara, to form a unity government if they helped him win the confidence vote. Samara is calling for Papandreou to step down and an election to ensue within three weeks following such a win. Essentially, the global markets, European leaders, and his own country have called his bluff. Papandreou and Samara have both announced that it is in the best interest of Greece to remain in the euro.
Argentina vs. Greece Currency Initiatives
Argentina left the dollar peg last decade to devalue their currency. It helped their economy and they didn’t have to implement huge austerity plans because they didn’t accept any bailouts from the IMF (they did in the 90s and didn’t like the results). What is the difference between Greece (now) and Argentina (2001-2002 crisis), and why it would not benefit Greece to leave euro? In one answer: exports.
Greece can’t export tourism and services, a major driver in their economy, but Argentina could export agriculture. In fact, Greece has negative net exports with €12.1 billion in imports and only €9.1 billion in exports according to March, 2011 GPD data. Because Greece imports more than they export, devaluing their currency would cause inflation which would hurt their import economy.
The other issue is social disorder. Both countries underwent sweeping social disruption and disorder during their respective debt crisis. Argentina didn’t need anybody to come to their country to buy cheap agriculture; they could just ship it out. Nobody will want to go to Greece to experience cheap services and tourism when there’s social disorder and rioting.
A default on their debt would not help Greece. The voluntary haircuts, as planned last week, will allow the debt to be clipped without triggering credit default swaps. They can still get financing from Europe at favorable rates. Argentina is still trying to come back to the capital markets.
Greece has had to pair back its debt and social programs to receive cheap financing. The problem is that their GDP is falling off a cliff and yields continue to skyrocket on their debt. Papandreou’s stunt this week did little to calm markets; no, it made it worse. Despite yields rising for Greek debt, the market began to move past the event on Thursday based on the referendum withdrawal. Markets are looking forward to a new unity government formed and parliament passing reforms and austerity measures to conform to last week’s debt bailout agreement.
The DJ Euro Stoxx index rallied 2.4% with good participation from various segments with a lot of strength in Greek and French banks. BNP was down 6% after earnings but closed up 7%. Italian 10-year yields are still elevated as opposition challenges are being raised against Berlusconi while he too plans a confidence vote. The vote would be held in 10-15 days to pass new economic measures to boost the economy and decrease debt. It seems that Berlusconi has a lot more chips on the table than Greece to play with and I seriously doubt the measures would pose the question of leaving the euro. The European debt crisis is far from over.
About Ryan Puplava CMT
Ryan Puplava CMT Archive
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