Greece is beginning to dominate global news once again as the newly elected party, Syriza, is trying to renegotiate the country's debt with its creditors, mainly the ECB. Both sides appear to be playing chicken which is creating uncertainty in financial markets with both Europe and U.S. markets recently stalling.
We’ve seen this movie before in which markets make little progress until the Greek uncertainty is removed. Back in 2011 and 2012 we saw several double-digit corrections with little to no net advancement in the S&P 500 while Greece dominated the news. News references for Greece skyrocketed and it was only until late 2012 when Greece began to withdraw from headlines that the S&P 500 broke out and began to rally strongly (see figure below).
Also of note is that while Greece remained absent from the news throughout 2013 and 2014 the S&P 500 powered higher by a massive tailwind in the form of quantitative easing (QE) by the U.S. Fed. Even after QE in the U.S. ended in October 2014 the stock market powered higher but stalled as we entered 2015. Then Greece began to make the rounds again by dominating global headlines with news references to Greece rising to their highest levels since the middle of 2012.
Source: Bloomberg
Developments with Greece are heating up recently as Standard & Poor’s downgraded the country on Friday as the following news article highlights:
Greece downgraded as S&P warns cash crisis could force it out of euro
Greece saw its credit rating cut on Friday night, with Standard & Poor's warning the country's cash constraints could force it to leave the euro.
S&P downgraded Greece to B- from B, one notch above default range, and kept the outlook on the nation at "negative", meaning further cuts to the rating are possible.
The ratings agency said the amount of time Greece’s new government has to reach an agreement with its creditors over its €240bn bailout has shrunk, with its worst-case scenario seeing the country being forced to leave the euro after European funding dries up.
S&P said the downgrade “reflects our view that the liquidity constraints weighing on Greece’s banks and its economy have narrowed the timeframe during which the new government can reach an agreement on a financing programme with its official creditors”.
Fears of Greece exiting the euro monetary system (“Grexit”) are tangible as Greek depositors are pulling their money from Greece’s banking system. At the end of December Greek deposit growth had slipped to -2.3% on an annual basis, the largest deposit outflows seen since January 2013 after remaining stable for the last two years.
Source: Bloomberg
Even former Fed Chairman Alan Greenspan gave a pessimistic view in which he said it was only a matter of time before Greece exits the euro:
Get ready for Greece to leave euro, says Greenspan
The former chairman of the U.S. Federal Reserve, Alan Greenspan, has predicted that Greece will be forced to exit the euro, as its new prime minister outlined plans to keep the debt-stricken country financially afloat.
In a bleak assessment of Europe’s future, Greenspan, one of the most influential policymakers of modern times, said it was “just a matter of time” before Greece dropped out, triggering the eventual collapse of the single currency.
His stark comments came just hours before Greek prime minister Alexis Tsipras told parliament he would on Wednesday ask fellow eurozone members in Brussels for an emergency short-term bridging loan, to allow Athens more time to negotiate a new debt deal…
In a BBC interview, Mr Greenspan, who headed the U.S. central bank for nearly 20 years, said “I believe [Greece] will eventually leave. The problem is that there is no way that I can conceive of the euro continuing, unless and until all of the members of eurozone become politically integrated – actually even just fiscally integrated won’t do it.”
This month will be centered around Greek developments and whether a compromise can be reached. The first important date is February 11th which is when the Greeks are to submit their financing proposals to the Eurozone finance ministers and is also when the eligibility for Greece to swap its junk-rated debt for money would expire as the ECB on February 4th removed its waiver (click for article).
The next important date is February 16th, which Jeroen Dijsselbloem, chair for the Eurogroup of finance ministers, said that Greece must either apply for an extension of its current bailout (set to expire Feb. 28th) to continue to receive financial assistance or to go it alone.
The ECB is likely taking a hard line with Greece so as to not embolden other anti-austerity parties within other European countries like Spain. The concern is that if Greece’s Syriza political party can force the ECB’s hand and engineer debt-reduction then other anti-austerity parties will follow suit and countries that have previously negotiated debt deals with the ECB like Cyprus may want a better deal.
The newly-elected Syriza party in Greece ran on the promise of cutting Greece’s debt in half which appears to be highly unlikely and should they fail to deliver after the above mentioned dates we could be in store for another Greek election if they get thrown out. Thus, it appears Greece will be garnering much of the headlines throughout 2015 but the climax for the Greek drama is likely to be this month.
Summary
Greece is taking center stage on the global scene again as there is a real risk of a Greek exit from the euro. This risk is weighing on global markets and increasing volatility with the S&P 500 making little progress this year as Greece began to make global headlines once more.
We have two pivotal dates ahead of us that should provide clarity on whether or not Greece will stay in the euro and restructure its debt or default and move back to the drachma. Until we have resolution regarding how Greece’s bailout program that expires this month will be resolved I wouldn’t expect the market to make any significant progress either higher or lower.
Related:
Stratfor's Reva Bhalla on Greece Exiting Euro, Russia, and Major Wildcards This Year
