The Greek marathon is at long last entering its final lap

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Ruth van de Belt, investment strategist at Kempen Capital Management comments on the possible implications of the Greek referendum.

Last Friday, the Greek prime minister pulled yet another trick out of his sleeve. He unexpectedly announced a referendum on the terms laid down by the country’s creditors for payment of the final tranche of the bail-out package. This means that Greece will probably be unable to meet its payment obligations. The decision has caused greater uncertainty, which in turn creates market volatility. The risk of a Grexit is now substantially higher, but still far from certain.

In the short term, equity prices will undergo a downward price correction and the spread on peripheral EU and core EU government bonds will widen. The euro will also come under pressure. We will not make any adjustments to our investment policy for the time being. We are inclining towards using the market volatility to shorten the duration of our bond portfolios and to buy equities. To do so, however, it is crucial that the ECB mitigates any potential system risk and that no further existential questions about the Eurozone arise in the wake of a possible Greek ‘no’.

Greece to hold referendum on bail-out plan

After Greece and its creditors came closer last week and a deal seemed within reach, Greek Prime Minister Tsipras unexpectedly announced a referendum last Friday. As we have said in previous publications, desperate needs lead to desperate measures. Tsipras is forced to manoeuvre within an impossible triangle: he wants to stay in power, he doesn’t want to impose any austerity measures and he wants to remain in the euro. Yet the question is exactly what the Greek people will be asked. Although the referendum is not formally on membership of the EMU or EU, this cannot be viewed separately from a referendum on the terms of a bail-out package. The Greek government is advising people to vote against the terms, while the pro-European opposition parties and the Greek central bank are advising them to accept them. The creditors are keeping quiet for now. However, we do not exclude the possibility that they will adopt a more emphatic position later this week and make a clear link to membership of the EMU and/or EU.

Greece likely to remain in default at IMF

The recent developments make it unlikely that agreement will be reached before 1 July on the final part of the second bail-out package being paid out. As Greece is completely broke, it cannot pay off its €1.5 billion debt to the IMF. Default on the payment will trigger an internal procedure at the IMF, whereby the IMF executive board will be formally informed of Greece’s default. Although a period of grace of nearly two months is formally an option, the IMF has already let it be known that this period will not be granted. The IMF executive board is likely to be informed of Greece’s default within a few days. Credit rating companies will not use this event to downgrade Greece’s rating to the lowest level. They will only do so in the event of default to private creditors. However, by missing a payment to the IMF the cross-default clauses on other debts may also be invoked, such as the loans issued via the temporary emergency fund (EFSF) or the government bonds that have been in the hands of private investors since 2012. The latter could yet result in Greece’s creditworthiness rating being downgraded. Whether the EFSF chooses to invoke the clauses is chiefly a political issue. We believe that it will at least await the result of the referendum. If the EFSF does invoke the clauses, write-offs will have to be made on the collateral held by Greek banks at the ECB.

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