How fed up is the trading community with Greece? I attended a hedge fund “idea dinner” last night, where roughly 15 investment professionals exchanged trading ideas, both long and short.
When it came to the subject of Greece, most just shrugged. A surprising number thought it would be good in the long run if Greece defaulted and left the euro zone.
But most didn’t want to talk about it.
That about summarizes the trading community attitude: so fed up they don’t want to talk about it anymore. So fed up they seem to have run out of things to say about it.
“Volumes are terrible and traders are fed up w/ Greece,” one hedge fund friend messaged me. “If they get kicked out…maybe that’s a negative event, but who knows?”
Here’s how confused things are on Greece: Traders aren’t even sure what resolution would be best for the markets.
“The market isn’t trading worse because there is a firm belief that whenever there is an event driven by a policy decision that decision will go the way the market wants, even if the market doesn’t know what it wants…like Greece,” one trader told me.
That’s how confused things are. But I think traders who thinks “Let ’em go. Let ’em default” are kidding themselves.
Proponents of a Greek exit have talked themselves, out of sheer exhaustion, into believing that:
1) allowing Greece to go back to the drachma will make the country more competitive and turn it into some kind of dirt-cheap tourist mecca;
2) the idea of contagion is overblown, because European banks own very little Greek debt and the European Central Bank will just increase the size of its quantitative easing program to manage its way through the crisis. The Greek exit will bring the remaining members closer together.
Having witnessed the 2008 crisis firsthand and the unforeseen effects of contagion, I’m not buying into any of this.
How about this as an alternative vision:
1) a failed state sitting on the edge of Europe;
2) hundreds of thousands of impoverished Greek citizens fleeing the country, causing destabilization in one of the least stable parts of the world (the Balkans);
3) a Russian naval fleet in Athens harbor.
Sound crazy? It’s not. That’s why even the dreaded “muddle through” option is more desirable than a default and exit.
And my bet is muddle through will happen, again.
There’s another (political) reason why “muddle through” is a very real option: Since most of the debt is owned by sovereign countries and large institutions like the IMF, it would be the job of politicians—many of whom are still in office—to explain to their electorate why they just lost a pot of money to the Greeks when they default.
“Muddle through” will push the deals that created much of the debt further into the history books. New political leaders, who didn’t make those deals, will find it easier to take the losses everyone believes are coming.
All this makes one long for the relative transparency of a Federal Reserve meeting, which, thankfully, is now upon us.