TheChek News Flow

…Greeks Bearing Gifts

This weekend, the Greek government has surprised the market—among others. Greek

developments have been a tail risk of varying intensity for the markets over the past

few months. While on its way to a culmination point, a deal between Greece and its

creditors was looking increasingly likely in recent days; the opposite is now the case.

Very soon, global markets and policy makers will need to react to the new information.

How much will each react and how should we think about it?

Think of the End Game but Focus on Next Week: First Down then Up?

Forecasting Greek developments and their market impact has been a humbling

exercise; it just got more difficult. Our framework is to tie two medium-term

probabilities and one outcome together for this week. We examine the current

dynamics around a) the probability of GREXIT and b) the probability of contagion. We

also imagine the most negative outcome for markets: GREXIT coupled with noncredible

policy response at least within the market relevant timeframe (please see below

for details and milestones). The intersection of these three sub-exercises paints a picture

of uncertainty for this coming, critical first week, which will need to be priced but also

likely to be adjusted with the help of policy makers.

Think Bunds at First, (Our) Focal Points Next and for the Rest

It is unlikely that investors can afford to passively observe the developments play out

this week, irrespective of their confidence on the degree of credible policy response.

The impact ahead is likely global, so the potential menu of instruments used for market

action is large. However, legacy policy as well as likely new policy initiatives coupled

with liquidity considerations point to buying bunds as a dominant strategy at the very

beginning of this week. Beyond the first reaction, and for a richer set of asset

implications, our exercise above generates our expected average market reaction during

the coming week. The farther away we observe assets from their respective average

response, the higher our preference to act (please see discussion of these focal points

later on in the report).