Greek voters have resoundingly rejected (61/39) the proposed terms of a bailout by the Euro Zone. We believe the vote is actually a positive development in the Greek debt crisis on three counts: first, that it was a vote to reject the current proposal by the European Union, and emphatically not a rejection of the Euro itself; second, it gives Prime Minister Alexis Tsipras the mandate he sought to negotiate a better deal with the EU; and, third, it places direct pressure on Tsipras to get a deal done. A fourth positive indicator is the resignation of the Greek Finance Minister, Yanis Varoufakis, who had become an irritant to creditors, and whose departure is widely seen as an indication Greece is ready to deal.
The markets are showing continued volatility, and are subject to extreme headline risk. The biggest risk is not economic or financial contagion - as the ECB is well-equipped to handle these - but a sudden decline in the risk-appetite of investors. With this in mind, we raised additional cash during the week of June 22nd and we stand ready to deploy cash and exploit opportunities as they present themselves. It is important to note that effective and active risk management is essential at this time.
Ultimately, it boils down to whether we think there will be a recession in Europe or not. We strongly believe Europe is not headed towards a recession for the following reasons:
- The ECB has a lot of credibility, and have claimed multiple times that they will do whatever it takes to maintain the Euro’s viability. In addition, the ECB will increase QE if need be, and, last week announced more purchases of mostly Italian corporate bond assets. We believe that they will do more if need be.
- Greece is too small to make an impact on Europe’s well-being. It will be a problem financially, as the market has distaste for uncertainty. Longer term for the real economy, however, our companies will benefit especially with ECB standing guard.