Greece is in the headlines … again. But in our view, the events of this past month are about Spain, not Greece. There is no need for us to review the Greek soap opera (it is all over the news), but suffice to say, this is the first step in a process that virtually assures a terrible outcome for Greece (either painful internal devaluation, or an outright default to the Troika and/or disastrous consequences as they convert to the drachma).
That said, while that is unfortunate, Greece as a country occupies a degree of attention far beyond its actual materiality to Europe (1% of total European GDP; < 2% for Eurozone – source: SNL Financial). To put it into Canadian context, Greece is as economically significant to Europe as Markham, Ontario is to Canada. Note that Greek sovereign debt is also small at ~€320 bln (~170% of its GDP – and rising). Its largest creditors are the Stability Fund (i.e. other Eurozone countries), EU, IMF and ECB, which together account for ~75% of the total. Put differently, three-quarters of Greek sovereign debt has essentially been de facto nationalized by other countries. According to KBW, an extremely small amount of Greek sovereign debt – i.e. ~€50 bln – is actually in the capital markets (the rest is “other”). For context, the top 50 European banks have total assets of €25 trillion (yes, with a “T”) and non-Greek banks have effectively zero exposure to Greek sovereign debt (fun fact; even if 100% of this €50 bln was held exclusively by European banks – i.e. versus zero – it would account for ~0.2% of total assets).
But, in our view, the events of the past few months are about Spain.
As we have said many times, it has always been our view that the Troika was going to make an example of Greece, with the objective of trying to deter the growth in popularity of anti-austerity parties/movements across the continent with an emphasis on Greece/Italy (i.e. “vote for me, and I will get you money from other countries – just like Syriza did for Greece!”). We also believe that one of the Troika’s primary targets is Podemos, an anti-austerity party in Spain, that is very much in the mold of Syriza (the party’s leader, Pablo Iglesias, recently accused the IMF of engaging in “financial terrorism”, for we presume, expecting to be repaid the money it is owed). Although Podemos has experienced a notable decline in popularity this year, it remains a competitive party in Spain at ~20% in the polls, an impressive feat for a party that polled closer to zero as recently as 2013. That being said, the party is very unlikely to win this year’s Spanish elections (much less a majority of seats and a clear mandate to renegotiate Spain’s bailout status in the Eurozone). With all of the talk about Greece, there are numerous pundits and commentators that posit the idea that a “Grexit” calls into question the future of the eurozone.
We have the opposite view.
The Troika is – in our view – trying to show explicitly that leaving the Eurozone is a very painful process and too risky for the “average” European voter to contemplate. They also want to show that there is no “free ride” on the backs of northern European taxpayers. And the ineptitude of Syriza is helping in that cause. Perhaps the best question after this weekend is not; “will there be a Grexit”, but rather; “what is the likelihood that a Spaniard would vote for Podemos later this year, after witnessing the chaos in Greece?”. In our view, anti-austerity movements across Europe were very likely damaged by capital controls/bank holidays in Greece, which underscored to voters the “real world” easy-to-understand consequences of this risk.
In our view, one of the primary objectives of the Troika is to weaken anti-austerity movements and to the extent they are successful, it will be a big positive to the long-term stability of the Eurozone.
Note, all data is from Hamilton Capital or Keefe Bruyette and Woods (KBW), unless otherwise indicated.