"Kee" Points with Jim Kee, Ph.D.

Greeks voted “no” in Sunday’s referendum on whether or not to accept their creditors’ conditions for further bailout funds. This was a surprise to me, largely because it is a step towards expulsion from the Eurozone for Greece, a move that in the near-term would drastically lower the standard of living of the average Greek citizen. But the referendum was on whether or not to accept austerity measures by Eurozone and IMF officials, not a vote to leave the Eurozone. I can only assume that the Greek voters feel that they can strike some sort of deal with their creditors that is better than the one they just rejected.

 

That’s something Germany is steadfast against, but not so much France. These are the two largest countries in Europe (ex UK), and Germany’s Angela Merkel is meeting in Paris today with French President Francois Hollande in order to hammer out what stance they will take on new proposals put forth by Greece, which are expected tomorrow evening. And an emergency summit of European leaders has been called for tomorrow (Wells Capital). It’s a dicey situation, because if Greece’s creditors (IMF, European Commission, ECB) are too lenient with Greece, it could embolden other debt-plagued European countries to demand similar concessions. And to be honest, I agree with economist John Cochrane (University of Chicago) that at this point the IMF, ECB, and the rest of Europe are just loaning Greece the money to pay them (the ECB, the IMF, the rest of Europe) back (a loan roll-over negotiation rather than a lending negotiation). Interestingly, Greece’s “fiery” Finance Minister Yanis Varoufakis resigned over the weekend. Greece’s creditors considered Varoufakis an obstacle to resolution, so this is a potentially positive development. Indeed, Varoufakis said he wanted to give Greek Prime Minister Alexis Tsiparas a fresh start in reforms talks (CNBC).

 

Implications: The potential scenarios going forward (and legal intricacies) would take pages and pages to spell out, and I’d still probably miss a few. That’s where the market signals help, and local and global risk measures point to problems within Greece but not really beyond Greece. Time is short for Greece, as they will run out of money (including ATMs) in a couple of days. University of Chicago professor Anil Kashyap has argued that the “no” vote likely means a further collapse in tax collections, and that Greece will probably stop payments on debt, effectively cutting itself off from credit markets. The Greek government then will likely distribute IOUs to government employees, vendors and pensioners, which will quickly trade at a discount in preference for euros. And there are already reports that Greek people are telling their employers (unemployment is > 25%) to hold onto their paychecks rather than depositing them in Greek banks for fears of a bank “bail-in.” That’s where depositors (liabilities to the banks) are forced to write-off a portion of their holdings.

 

If you tend towards the pessimistic side of things, you might want to read Niall Ferguson’s piece in the Financial Times, “The Nasty Greek Outcomes that Democracy precludes.” Ferguson points out that, as recently as the 1970s, the worry would be that a real communist left would be poised to take over the “proletariat” Greece, or a real military right ready to impose martial law, or a revolution or coup or civil war. Now it will be a few demonstrations and maybe a few punches. Ferguson makes the case that, outside of a few countries like Venezuela and Thailand (I’d throw in Russia), these sorts of worries are almost gone. He asserts, “Politically, most of the world has never been more boring.” That’s an interesting perspective.

 

China: I thought it might be helpful to bring you up to date on China, as it too has been in the headlines a lot lately. China has pretty much been the poster child for “high economic growth, poor shareholder returns” over the past few decades. But year-to-date Chinese stocks, the A shares that are only listed on Chinese exchanges and available only to domestic investors, have been on a tear – up over 44% (up 142% over the past 12 months!). That was until the beginning of June, at which point they took a breathtaking nose dive of over 30%. In a nutshell, the Chinese are world champion savers, which is self-insurance in a country lacking social safety nets. Government policy has constrained where this savings can be parked, and it has, among other things, led to a real estate boom that overshot. This in turn has lead the Chinese people to look to stocks for savings returns (Stratfor). There is a lot of government intervention in Chinese stock markets, from encouraging stock buying with borrowed money, to pressuring state owned firms to invest, to “stock stabilization” funds. State officials have encouraged this bull market from the start, prompting the opening of 30 million new trading accounts this year by new investors (bringing the total to 90 million), many on margin (i.e. using borrowed money to buy stocks). So, government officials there do not desire a crash. But the track record of “managing” stock markets, particularly in Asia, is not particularly promising.