Why I bought Greek stocks today

I just came back from a very pleasant two week vacation spent mostly in Greece, and despite the natural beauty of the islands and sunny disposition of the locals, you could not help but be affected by the mounting tension as the debt drama enters its ultimate stages. However, upon returning to Asia – and after Greek PM Alexis Tsipras’ shocking decision to put the latest EU bailout offer to a popular vote this coming weekend – I decided to take a bit of a punt on the long side in Greek stocks (via the ETF listed in the US, GREK is the ticker).

Let me explain: for the most part I am not a macro investor (other than occasional currency trades); nor am I an expert on the current European situation or the Greek debt crisis. I am however a believer in ‘behavioral finance’ and from this perspective I think the current ‘base-case’ narrative about Greece at the moment – that Greece will now default and exit the Euro – is a bit off. Let’s backtrack a little to start.

The Tsipras government was elected a few months ago with a curious mandate: the campaign was based on an anti-austerity platform, but not a “leave the Euro and go back to the drachma” platform (this is confirmed by even a cursory examination of Tsipras’ recent as well as past rhetoric). Both Tsipras and his vitriolic finance minister, Varoufakis, have been quite clear in pushing a hard line on ending austerity, but on wanting to keep Greece in the Euro. This makes sense: polls have consistently shown the majority of Greeks want to stay in the Euro, but has been a difficult course to navigate in negotiations with the EU (since any statements by the Greek leaders to the public about not leaving the Eurozone only help the EU bloc in their negotiations).

Now, whether you believe the calling of a referendum is the act of ultimate brinksmanship or not, representatives of the EU bloc – from Juncker to Merkel to Schaubel, etc – have clearly outlined that a ‘no’ vote from the people in the referendum would effectively signal a Greek exit from the Eurozone (no matter that the Greek PM claims otherwise). It is vital to understand that while these negotiations have been dragging on in recent weeks, Euro-denominated deposits have been exiting Greek banks, first in a trickle, and more recently, in a flood, as worried Greeks fear that a) their local banks will be insolvent if Greece defaults (true); b) any remaining currency may only become available to them later in drachmas in the worse case (likely true); and c) even if they do get their money back in Euros or drachmas, it could take many months to sort out the mess after a default (also likely true). The only reason Greek banks didn’t shut before this past weekend was because the ECB provided ‘Emergency Liqudity Assistance’ (ELA) – effectively, an emergency loan – to the Greek central bank, in the form of Euros which were used in turn to fund the Greek banks and allow the ongoing outflow of deposits. Hence the ECB effectively upped their exposure to Greece, assuming the negotiations would get done.

Now, however, with the calling of a referendum and the spectre of a default, the ECB has capped the ELA (ie not providing any new funds), forcing the closure of banks (and the stockmarket) to prevent a full-scale capital rout. It was this action that caught the Greek leadership completely by surprise and prompted the following response from Tsipras:

It is clear that the objective of the Eurogroup’s and ECB’s decisions is to attempt to blackmail the will of the Greek people and to hinder democratic processes, namely holding the referendum. They will not succeed. These decisions will only serve to bring about the very opposite result. They will further strengthen the resolve of the Greek people to reject the unacceptable memorandum proposals and the institutions’ ultimatums. One thing remains certain: the refusal of an extension of a few short days, and the attempt to cancel a purely democratic process is an insult and a great disgrace to Europe’s democratic traditions…What is needed in the coming days is composure and patience. The bank deposits in the Greek banks are entirely secure.

I have highlighted the statements I feel are most inaccurate and the source of the current opportunity. Tsipras can rage all he wants, but clearly bank deposits are not secure – otherwise why close the banks? More importantly, put yourself into an ordinary Greek citizen’s position at the moment. A huge percentage of adult Greeks (perhaps a quarter to a third) are unemployed: as such they rely on savings and/or pension/government assistance to survive. Banks have been shut and may disappear, and clearly the pension or government handouts could too if a Euro exit throws the country into chaos. We all know the economy has been suffering for years and even those lucky enough to have jobs, I’m sure, rely on savings/government help for subsistence.

If you were the average Greek in this situation, would you vote to maintain your supposed ‘pride’ and go along with a bunch of politicians? Or – knowing that the alternative likely bankrupts you and most all your family – would you vote to stay in the Euro and accept the supposedly unfair bailout terms? Even if a default and Euro exit happens in 6 months, at the very least you could access your bank account again and get your money out. And in any case the bailout terms could potentially be renegotiated again down the road (after all, it has happened many times before).
In short, while the politicians appeal to national solidarity, in a situation like this, for those unfortunate souls struggling at the margins – and the sad reality in Greece is that a large proportion of the population is thus positioned – you have to think of your immediate survival first. That means cash in hand – and the only way to guarantee you have that in the immediate term is to stay in the Eurozone.
Hence, I expect a solid ‘Yes’ vote from any referendum this weekend, which should provide a massive relief rally to markets globally but especially Greek stocks (which will stay closed this week but have been killed in recent weeks and were -20% in US trading yesterday). Initial opinion polls suggest a “Yes” outcome is more likely, noting the desire of most Greeks to stay in the Eurozone, though of course the situation is fluid. Such an outcome would lead most likely to the fall of the Greek government and therefore some political instability – but the will of the people to remain in the Euro will have been made clear, and that should be calming for markets (and tangentially negative for the Euro). There is also a small chance that the Tsipras government, sensing the wind of popular opinion, backs off the rhetoric a bit, the referendum doesn’t happen and sides return to the negotiation table and hammer out a deal – this would also help Greek markets, clearly.
Of course, this is a very binary outcome – Greek stocks could fall another 50% or more if they do exit the Euro – and so all the usual disclosures apply and then some: this is most definitely the ‘deep end of the pool’ (experts swimmers only). To guard against the downside case I am expressing my bullish view through call options (which limit my risk to the premium paid, if I am wrong), and I would suggest those like-minded do the same.

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