There Will (Still) Be No "Grexit"
“There comes a time in crisis negotiations,” tweeted Jim Rickards yesterday, “when you think, Oh, well, if it all goes wrong, at least I can sleep in tomorrow. I’ve been there.” The thought had to have crossed Greece’s Prime Minister Alexis Tsipras’ mind last night.
You can tell Greece is in crisis, said Jim, because officials were “busy, busy, busy on a Sunday.” As you’re probably sick of hearing by now, Greece owes the International Monetary Fund $1.6 billion tomorrow but may not be able to pay it.
To keep kicking the can down the road, Greece requires bailouts from the International Monetary Fund, European Commission and European Central Bank. Those funds come with strings attached that Greek officials haven’t yet been able to abide.
Still, we double down on a premise Jim Rickards’ first outlined in 2010: There will be no “Grexit.”
“Greece asked for another month to sort things out,” recapped our friend Chuck Butler in this morning’s Daily Pfennig, “and put out a referendum to the Greek people to vote on the aid package restrictions. Unfortunately, that referendum won’t take place until July 5, and Greece’s loan payments are due to the IMF tomorrow. The IMF said, ‘No mas. No more extensions, no more playing around. You have until the end of day on Tuesday to pay us or go into default.’”
In response, the Greek government followed the standard crisis handbook: Call a bank holiday. Reports have been made of ATMs running out of cash — each person is limited to only 60 euros per day — and Greeks are hoarding gasoline and groceries.
“Bank holiday”: Greek pensioners line up outside national bank in Crete.
The news “whipsawed the euro,” reports Chuck. “The single unit lost two whole cents right out of the starter blocks in the Asian open last night.” At writing, the euro’s recouped those losses and is up 2%, at $1.11. Go figure.
To boot, Jim Rickards’ May 12 forecast that the euro is headed to $1.20 is still a go. Over email last night, he reiterated his position. “It’s true that the euro may back up on the Greek news,” wrote Jim, “but that is likely to be temporary. A weak euro means a strong dollar, and that is killing the U.S. economy. So a stronger euro is still expected.
“The same news that drove the euro down,” he said secondly, “is also driving gold and U.S. Treasury notes up. So the Strategic Intelligence portfolio should be making money on gold streamers and our bond fund.”
And third, Jim’s recommended “cash position (not in the official portfolio, but always something we write about) is doing its job of reducing volatility and letting investors jump in on dips.”
The operating premise is that Greece defaulting and Greece leaving the euro are not mutually exclusive events. Greece can leave the euro one of two ways: quit or be kicked out. Although you’d be forgiven for not knowing that if you relied only on the mainstream media’s account.
Case in point, an inference drawn in a New York Times article yesterday:
“A ‘no’ vote almost certainly means that the country will walk away from the euro and create its own currency (which will surely devalue sharply), bringing financial chaos in the near term but creating the possibility of a rebound in the medium term as the country becomes more competitive with its devalued currency.”
But it ain’t necessarily so — or even likely. “I remind people,” says Jim, “that Cyprus is still in the euro. Bank failure and debt restructuring is not a Grexit.”
That said, Greece could be kicked out of the union by political decision. Or at least EU leaders want Greece to think it’s a possible outcome. “The European Commission chief, Jean-Claude Juncker, has said he feels ‘betrayed’… by Greece in failed debt talks,” reported the BBC this morning. His “message was clear — vote ‘yes’ to our proposals and we’ll support you. Vote ‘no’ and you’ll probably get kicked out of the euro.”
Yet again, Rickards adds some clarity. “I think Germany miscalculated,” Jim explained on Bloomberg this morning, and now “they’ll have to blink and back away. The ECB and Greek plans are not that far apart. I think one side will back down.”
He offered up at least three ways out…
The Greek people could vote “yes” to the bailout terms on the July 5 referendum…
The Greek government could simply agree to the bailout terms and call off the referendum…
Or the European Central Bank could pay the IMF on Greece’s behalf, seeing how it owes Greece billions for profits on its securities markets transactions.
Either way, “two weeks from now,” Jim concluded on Twitter, “people will think Greece is a musical starring Olivia Newton-John.”
P.S. Our friend David Stockman has analyzed the financial system’s fragility thanks to central bank machinations… and the impact that Greece’s 11th-hour maneuvers could have on the casino — er, market. Click here to read more.