Greek Saga Continues

Monday, June 29, 2015
by M&P Research Team

Over the weekend, news poured in regarding the intensification of the crisis in Greece, and the headlines have continued into this week. EU-Greece talks were called off on Friday when the Greek Prime Minister, Alexis Tsipras, abruptly announced that a national referendum will be held on Sunday, July 5th to decide whether Greece should accept the terms of the new bailout program. The implication of this vote extends beyond just the terms of the bailout deal, as it may effectively determine whether Greece will stay in the Euro or not. EU officials have refused to extend the bailout program beyond Tuesday, so the Greeks will be voting on a bailout offer that has actually expired. Given this situation, even if the Greeks vote in the affirmative, it is uncertain how events will progress beyond Sunday. Between now and Sunday, there is however still a possibility that the Greek government will strike a deal, even though technically, the deal in its current form is off the table as far as the EU is concerned. A €1.6bn (C$2.2 bn) payment is due from Greece to the IMF on Tuesday and Greek officials confirmed earlier this morning that they will not make the payment. This puts Greece “in arrears”, and the IMF board will then decide whether Greece has defaulted or not.

In order to stem capital flows, capital controls have already been imposed and banks are shut down for the week. However, as is common in such fluid situations, an update was issued today stating that banks will in fact reopen on Thursday to allow pensioners to access their funds. The effectiveness of the capital controls is debatable, and it is likely that a significant proportion of the mobile money has already left the country. At this point, EU officials have said that they are willing to talk if the Greeks come back to the table, but they are refusing to give in to Greek demands. The Emergency Liquidity Assistance (ELA), administered by the ECB, is currently the only source of funding for the Greek banks and is being capped at this time. If ELA were to be pulled, Greek banks would be insolvent immediately.

The current consensus, based on media reports, is that the Greek citizens are likely to vote “Yes” (i.e. accept the bailout offer and thus stay within the Euro). However, given the inflamed passions in both camps, and with a week to go before the referendum, the final outcome remains highly uncertain. A negative vote could lead to substantial economic turmoil for the Greeks, a potential reversion back to the Drachma as a currency should Greece leave the Euro zone (i.e. “Grexit”), and significant potential volatility in the financial markets. While the Euro region is expected to come back on track, Greece’s economic future will be uncertain.

Given the volatile situation, and the potential repercussions from a Grexit, we reduced our exposure to European financial institutions as we felt that this sector may bear the brunt of the initial fallout. In addition, we have increased cash levels among a number of our pooled portfolios, with a focus on those pools that have the highest international exposure. In fact, we already witnessed this in the past day when the financial sector was down more than the broader market indices. With the bailout set to technically expire tomorrow, there is still significant uncertainty as to how the situation will unfold over the course of the week, and therefore we are prepared to witness further volatility in the markets in the coming days.

Having said that, should the market turn down, we stand ready to buy more stocks – ones we already own or those which we have thoroughly researched – when their prices fall below our entry prices. This approach, which is consistent with our investment process, allows us to own companies in which we have confidence, while managing the risk-reward profile of our portfolio. Our research team continues to monitor the developments in Europe and will act in a manner that is consistent with our fundamentals-based investment process. Should you have any questions on the current affairs of Greece, contact us at (403) 234-0005 or [email protected] 



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