Gaming it... into the abyss

Kalinixta.

Well, so much for Yanis Varoufakis and all his famous game theory. All I can see is an act of supreme cowardice. Yes, and I mean that. It’s nothing but simple, old-style cowardice.

Alexis Tsipras and Varoufakis have misread the situation, overplayed their hand and now, when standing in front of the precipice, they are passing the ball to the Greek people. “Don’t blame us, noble Hellenes, you took the final decision, not us….”

There has all along been no doubt that the Syriza bunch was going to push the powers that be to the very edge but very few of us could have envisaged that they’d go as far as to push them over it. Now that they have done, they’re crying foul and, as noted, are running and hiding behind Stavros and Helena Six-Pack like guilty little boys when they’ve broken the neighbour’s front window with an ill-judged kick of the a football.

Game theory, my foot!

Now the people, with a fraction of the information with which some of the smartest brains in Europe have not been able to work out the next step are going to offered a binary choice. Not only that, but by all accounts they will be asked to vote on an issue over which their government has no control. “Do you want Greece to retain the euro?” is a simple question but one which continues to defy the simple matter that it is the collective of a club which decides what its rules are and who can become or, in this case, remain a member. In all clubs I’ve ever been involved with, those who fail to abide by the rules are very firmly asked to leave.

The parliamentary elections which brought Syriza with its rainbow coalition of left, hard left and loony left politicians to power has no binding influence on the rest of the euro area and to declare that the people had democratically mandated Syriza to oppose austerity has absolutely no validity outside its borders.

The threat to the integrity of the single currency project which a “Grexit” posed has, over a five year period, been absorbed and the Athens Spliterati now look just like Wile E. Coyote as he hangs in space having overshot the corner, looks down, grimaces and the disappears into the abyss until all we see is a tiny puff of dust as the hits the distant bottom. Meep-meep!

Joking aside, the decision by the Athens government to close the banks – my chum and fellow scribbler Bill Blain of Mint Partners has been waiting for months for this to happen – is probably too little too late. Greece has not suffered a run on the banks but over a long period of time something more akin to a jog.

Following the Cyprus experience, those with the ability, that being prosperous and educated upper an upper-middle classes, have long got their money out of the country and into accounts in Germany and elsewhere so once again it is those who can least afford it and who represent the core Syriza electorate who will bear the brunt of their government’s misreading of the situation. In theory, a Grexit can still be prevented but in practice it will now most probably be very hard to stem the momentum. All we, for our part, can do now is to sit quietly and to watch what happens next.

No panic

Market reaction has, at the time of writing, been fairly sanguine. Sure, Asian markets are lower and Europe will also have a wobbly day. Bunds opened around 20bps tighter at 0.72% but that is nothing special in the context of where they have been trading in the past few weeks and although the Euro Stoxx futures opened down 7%, I would go along with those who want to take advantage of any panic and load the boat.

We should not forget the technicals; we are right in the middle of half-year end although today’s trading largely settles in the new month. Nevertheless, the risk is on as of today and although many investors find themselves measured based on settlement, the majority won’t and whatever happens during the next 48 hours will determine their first half performance.

There is, as always, safety in numbers and although a big dump won’t help those who’s money is at stake, the managers themselves are protected from the worst by having their performance measured against indices. Hedge funds are, by all accounts, more or less well positioned for a hearty dump in risk assets and anyone who was overexposed going into this deserves nothing better than to have their rear-ends handed to them on a plate.

So what next?

European peripherals will certainly not be a lot of fun to be in but a sharp mark-down just ahead of the half-year will possibly help them perform nicely again in H2. I repeat that Greece contributes not much more than one third of one percent of global output and once dealt with, the rest of the world can get on with focusing on growth. I can’t see even speculative investors piling out of the Portugals and Spains just for the sake of it; there are other markets around the globe which are better shorts, should they really be looking for the next victim.

None of this will, let’s face it, ever be able to make the euro whole again. If one is honest, it never has been much more than a fixed exchange rate mechanism – despite all the fighting talk, without full fiscal union it couldn’t be – and although there are weak members left in it, none of them have behaved like Greece and therefore I can see no particular reason for them to be treated like Greece.

So much for the rant; now to the simple facts. I shall be a bit cheeky this morning and borrow the overnight comment from the fine economics team of Commerzbank who offered up the following upon which I can hardly improve:

Today everything else is minor but the end of the week brings the US Employment numbers which will shift the focus, irrespective. Plenty of time until then to get things wrong.