A deal has been made which will “solve” the default issues for Greece.  Stunningly the agreement was ostensibly the same their voters rejected a little more than a week ago!   Either the ECB / IMF told Alexis Tsipras (Prime Minister of Greece) that the only choice was to accept the previous deal or what will transpire will be much worse.  

An alternative where they would lose the Euro and revert back to their pre-EU currency known as the Drachma. They will also suffer the consequences of being a pariah in the international debt and economic community.  One would suspect that if the latter would have materialized, the odds would favor the Drachma would have recorded a substantial devaluation and the Greek economy may have experienced rampant inflation.   Tsipras probably calculated that the anger of the populace by rejecting their will was far less than if they would have vacated the Euro.  

At the same time one must consider that maybe the ECB / IMF played a mighty mean game of chicken.  Could they have needed a deal much more than Greece? 

What we have been told is that if there would have been a default and an exit from the euro, the Greek citizens might have experienced substantial economic hardship.  Yet all of the other players may have lost more.  First, they might have lost most if not all of their “investment”.  Yet what is probably more important to the ECB / IMF; is that it could have caused the Euro and the EU to implode shortly thereafter.  The one question that many were asking, if Greece defaults then who is next?

The ECB / IMF appear to have decided to kick the can down the road.  Some even believe that Greece will make their payments to the ECB and IMF.  While anything is possible, there is a good chance that Greece will default between now and the end of the deal.

So why would the ECB / IMF make the deal when a future default is probably more than 50 / 50?  It might be that they were caught off guard and didn’t have a contingency plan if it would have occurred?  It might be that the ECB / IMF believe that there are some really valuable assets to be secured?  They could also believe that if the proposals would be carried out and decent growth would occur going forward, then they will recover a great deal of what they are owed.

In the end the financial markets are right back to where we started.  That’s the same case with regards to the Market. The S&P 500 closed at 2107 which is slightly above where it was (2101) just before the specter of the possibility that Greece may default.  Volatility continues to be something that may occur as issues in Puerto Rico and China; the earnings releases from many US companies and the possibility of increasing interest rates warrants some consideration.  Maybe some catalyst will break us out of this eighth month trading range in the near future.

If you have any questions or comments regarding this blog or any other thought, please contact me at trgblog@trgcap.com. Thanks for reading!!!

Tom is the Founder of TRG and has been the President and Chief Investment Officer since 2008.