In case you’ve been living under a rock for the past few years and are very fond of spanakopita, philosophy and olive oil, we have good news for you: Greece just made the news. They became the very first world nation to default on a loan from the IMF.
To get you up to speed: Greece has a lot of debt and no money. (Again.) It is trying to get more money without having to promise to hand its creditors what’s left of its nuts. (Again.)
What’s different this time is on this Sunday, July 5th, the entire country is going to vote in a referendum on whether or not to accept the terms of the ECB’s latest bailout package. If they vote ‘no’, they might exit the EU (or, if their Prime Minister 1 Alexis Tsipras is to be believed, stay and just have a stronger negotiating position). The referendum, either way, will have a huge impact on markets worldwide.
Here’s the debt playbook, from the Greek pros themselves:
How to Default on an IMF Loan (and Make History!) in 7 Steps
So it’s time to have some elections. You invented democracy, god dammit.
So what is the worst that could happen?
All sarcasm aside, the short answer is a humanitarian crisis. Greece has already swung way toward the political fringes, the way countries in the shitter tend to do. If it leaves the euro entirely, the Greek people—already screwed by astonishing incompetence at home and ideological zealotry on the part of the EU—are going to be up poverty creek without a drachma. Well, they’ll have drachmas, but that’s like being up poverty creek with a wallet full of toilet paper.
Now you know all you need to know heading into the referendum on Sunday. So what do we expect to see in the capital markets?
Since Tsipras announced the referendum, the markets have basically shrugged. We’ve seen exactly what we’d expect in the wake of flip-flopping good and bad news regarding the firmness of Greece’s position, with the caveat that nothing has moved the needle much.
Markets slumped into the weekend of June 27th after being buoyed for a few days on positive news regarding the same damn piece of paper they’re fighting over now. With the news of bank closures and capital controls in Greece, the euro sagged heading into the week afterward. To be fair, as people began unclenching various muscles clenched in knee-jerk fear on Monday, the euro staged a rally against the dollar. (Of course it dropped later in Asia amid news that Tsipras was doubling down on the referendum; dude singlehandedly destabilized world markets for a few days.)
But the takeaway was just that investors trust the ECB to handle it. The past several years have seen the rest of the EU’s problem children (Spain, Portugal, Ireland) cleaning up their acts with much more success than Greece. Reflective of that, there was no panic selling; just focus on keeping ships level through the disturbance.
And toward the end of the week, news emerged that the people of Greece may vote yes on the bailout and yes on staying with the euro. They’re not going down with Tsipras’s ship. The ECB kept intact its lifeline to the Greek banks, another sign for hope.
The world—and its markets—will absorb the outcome of Sunday’s referendum, Grexit or no Grexit. Generally, though, it’s inadvisable for U.S. equity and options traders to carry positions into the long weekend.
That said, if you are carrying longer term positions and are prepared to deal with short term volatility: hedge long positions with VIX calls and short positions with SPY calls. Directional opportunities are going to be a clusterf**k, and we can’t really see shorting below 2085 on the S&P futures. You’ll have to take a more active role in exiting one leg at a time because these instruments are bound to be overpriced. Options will naturally price in volatility as markets react to whatever happens on the referendum.
Bigger picture: as the election bears down, one of two things will happen. One, the Greek people will choose the option that reopens the banks. Two, the euro zone’s dynamics will be altered, and domestic forces opposed to the EU are going to use this episode as political fodder. The political fallout is going to be the potentially market-altering stuff. Keep an eye on it.
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