Letting Greece Go Could Be A Massive Mistake

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Market Drivers July 6, 2015

Greece Votes NO
Varoufakis resigns rallying euro on hopes of more constructive talks
Nikkei -2.08% Europe -0.62%
Oil $55/bbl
Gold $1166/oz.

Europe and Asia:
AUD ANZ Job Adverts 1.3% vs. 0.1%
EUR GE Factory Orders -0.2% vs. 0.0%
EUR Retail PMI 50.4 vs. 51.4
EUR Sentix 18.5 vs. 15.6

North America:
CAD Ivey PMI 10:00

USD ISM Non-Manufacturing 10:00

In a drama worthy of Sophocles the saga between the EU and Greece continued to unfold and for the second straight week the EUR/USD gapped lower on the open of week’s trading only to rebound once again as the day wore on.

The Greek citizens voted a resounding NO on the referendum question regarding the deal offered by EU, creating massive angst at the start of Asian trade as EUR/USD dipped to a low of 1.0970 but soon found support there once again and started to stabilize for most of Asian trade.

In the early hours of European session, the euro however rallied on news that Greek Finance minister Yannis Varoufakis resigned as a concession to EU finance ministers who found him to be an extraordinarily difficult negotiating partner. The colorful Mr. Varoufakis leaves the global stage at the peak of chaos as the situation with Greece remains uncertain.

His exit, does however suggest that perhaps the situation has taken a more pragmatic turn allowing Mr. Tsipras to assume a less confrontational with Brussels. Whether both sides seize the moment to create a more durable solution remains to be seen. The European authorities remain adamant about refusing to consider the issue of debt relief – yet debt relief is the principal problem that needs to be addressed if the parties are to arrive at a structural solution.

Perhaps the Greeks and EU will once again decide to paper over the debt problems and come up with a temporary financing solution, but it’s doubtful that markets will accept such an outcome nonchalantly. The danger of letting Greece dangle is both political and economic. If Greece is thrown into a state of chaos it will greatly weaken the confederate bonds of the European Union and will encourage the eurosceptic movements within the region. In Spain the anti-austerity party is gaining ground and while elections are six months away, the ascendance of Syrzia like movement in Madrid would create much greater fear in the capital markets than is currently present.

The EZ politicians are complacent and almost ready to cast Greece away on the assumption that most of the financial risk surrounding a Grexit have been eliminated. Certainly peripheral yields are far lower than they were in 2010 and armed with QE and OMT the ECB has far better tools to manage any volatility that could erupt in the markets. Yet no one of those measures would be enough if markets became concerned about much larger debt problems in the region such as those of Italy. Therefore it may behoove all parties to come to a sustainable solution as soon as possible so that the region could once again focus on economic growth.

Boris Schlossberg
Managing Director

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