Will this Beach Stay in the Eurozone?

Will This Beach Stay in the Eurozone

Will This Beach Stay in the Eurozone

How to trade the most recent Greek financial crisis

The country with some of the greatest beaches and islands, combined with history galore, is again front and centre in the collective dialogue about the euro and the continent’s political union. With talk of war reparations, a right-left (you read it right) government in power and unsustainable debt going around, there is probably too much emotion and noise for some traders to decide how to take advantage of the situation.

In order to untangle this we need to start with a bit of historical background (thankfully not back to the ancient Greeks). First off – why does Greece want compensation from Germany for the WWII occupation, and why does it want it now?

The short answer is populism that plays to the tune of confrontation with Germany. The collective psyche in the country remembers the suffering inflicted over 70 years ago (between 250-300,000 dead from killings and famine in the four short years of occupation). But is this a reasonable request, in the context of a unified Europe, more so with a collective agreement signed and paid for in 1960. Markets don’t seem to be giving too much thought to this one.

The second historical reference is more of a period – the one leading to and overlapping with the accession of Greece in the EU. Many still question the wisdom of that decision and claim that the country was never ready for the monetary union in the first place. For them, this is the root of all the current woes and the inherent weaker position that the country finds itself in, compared to the stronger economies using the euro.

Structurally the Greek economy can be classified as one in stagnation over the last several decades. Occasional growth spurts, mainly due to the stable and growing tourism industry, have been overshadowed by an overall decline in labour participation and a crucial lack of innovation and reforms.

What needs reforming here? By many accounts the pension and social security systems are overextended and not only provide unreasonably high sums (including a 13th and 14th pension ), but they also demotivate workers still in their active years. In a country which until recently had a growing population, but at the same time an aging one, this is definitely a problem, despite the money that comes back from large communities of emigrants in the U.S., U.K., Australia and South Africa. Tax-evasion and corruption are also fundamental problems that need to be addressed by whoever is in power.

Greek revenue vs expenditure
Greek revenue vs expenditure

Opponents that claim Greece was given a bad deal with their EU membership, entrance in the eurozone and subsequent bailouts from the so-called Troika, claim that this was all by design. This is the line that the new government in Greece and its prime minister Alexis Tsipras are following – they want their debt shaved (or cut in half) as it was unsustainable in the first place. They demand a new agreement that postpones payments and changes their structure. But it’s just kicking the can down the road for the likes of the EU, ECB and IMF.

How to trade all of this. First thing’s first – don’t forget the current context. Greece is not the biggest problem of the EU. The EU is still its own biggest problem. Although the country has an issue with not having enough money to pay state workers, hospitals and for other vital public services, the focus of markets is on the longer term.

The approaches to the trade begin with splitting it into two timeframes – short and long term. The short term is for the the coming weeks and possibly months and it will see some days where the EUR/USD and possibly all other heavily traded euro crosses react to news and statements from the two sides. These will most likely be in both directions provoked by uncertainty and fear on the one hand and reassurance and calls for calm on the other. This will give more room for shorter trades lasting between minutes and hours, but will not provide a trend. There will be many false dawns before a certain agreement is reached.

But a trend will emerge, either further south from what is already a multi-year low in the EUR/USD, or upwards. For long-term traders this is the time for making a prediction on fundamental reasoning. They choose between three options.

The first one is that Greece leaves the eurozone, returns to the drachma and probably receives assistance from Russia or China, decoupling it to some extent from the European economy. Fears are that this might have a domino effect and more countries will leave the pact and probably the EU (although Italy, which has a far greater debt than Greece, say their debt is sustainable). Euro crumbles and is possibly abandoned.

Second option – Greece stays in the EU, this crisis is resolved “peacefully” with more money thrown at it and with limited reform – both in the country and in the union. This is the continuation of the status quo and if the last months are any indication – more euro weakness.

Door number three – Greece stays in the EU and they both reform. Structural reforms ensue in the land of Aristotle and Alexander the Great, the EU decentralises and finds its competitive edge again. The euro climbs and maybe even Great Britain sees something good about the whole “we’re one continent” thing.

Options two and three will of course be influenced by larger issues, but Greece will remain a part of them. Choose wisely because in the end markets don’t care who is right or wrong, they don’t have a moral compass. Where they go is determined by where they see efficiency and inefficiency, as well as indications of what comes next.

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