Mathematics has the completely false reputation of yielding infallible conclusions. Its infallibility is nothing but identity. Two times two is not four, but it is just two times two, and that is what we call four for short. But four is nothing new at all. And thus it goes on and on in its conclusions, except that in the higher formulas the identity fades out of sight.” — Johann Wolfgang von Goethe Quoted in Newman’s the World of Mathematics
Will Greece leave the eurozone? Most likely not, for one simple reason: The consequences would be too dire for both sides. If I’m right about this, then the Grexit-related selling is way overdone in the shares of solid European companies like Daimler AG
and four others I mention below. That means they’re great buys today. Look beyond the Grexit-related angst, and you’ll find two bullish trends for European stocks: 1. A European economic recovery that’s picking up steam; and 2. More than another year of European quantitative easing as a stimulus to help the economy and, in turn, the markets. Before we get to details on European growth and more stocks that look attractive, here are the dim consequences that will keep both sides at the table until they hammer out a deal. The creditors Many analysts downplay the impact of a Grexit, citing relatively small loans to Greece. But European governments would actually be on the hook for a huge amount. It’s $540 billion, says Carl Weinberg, chief economist of High Frequency Economics. That’s enough to spook the Eurobond market and hurt European growth. Weinberg gets to his bigger number by including commitments others overlook. The large one is hidden, off-balance-sheet government guarantees of Greek loans from the European Stability Mechanism, an aid group that is technically a private company. Another big one is unsettled intra-bank payments that Greece would walk away from. Here’s a scary meltdown scenario from Weinberg: After a Greek default, European governments drag out the process of raising the funds to cover the European Stability Mechanism loans, which then get downgraded. That blows up a hedge fund, which holds the paper, and the damage spreads to its bank. Remember that early on in the U.S. financial crisis, many analysts wrote off the early signs as an isolated problem. Greece Here’s why the Greekgovernment will stay at the bargaining table: Its economy is getting worse by the minute, thanks to shuttered banks and cash shortages caused by a tight cap on ATM withdrawals. The government soon might have to start paying pensioners in IOUs, aka “funny money” that no one is going to like. The European Central Bank just tightened the collateral requirements on its loans to Greek banks. That shortens the time it will take for them to run out of cash. “The liquidity crunch could intensify, potentially causing the daily cap for ATM withdrawals to be reduced,” says Morgan Stanley economist Elga Bartsch. People don’t like it when you mess with their money. So all of this could spark riots, points out Lawrence McDonald, head of U.S. macro strategy at Societe Generale. Greek Prime Minister Alexis Tsipras “might not last three weeks in power if banking dysfunction creates civil unrest,” says McDonald. The bottom line here: Both sides have plenty of motivation to work things out, and most likely they will, even if the solution isn’t perfect. Which it won’t be. “Our base case remains one where an accommodation between the Greekgovernment and its creditors can be found and Greece remains a member of the monetary union,” says Dirk Schumacher, senior European economist at Goldman Sachs. European bargains If this is correct, European stocks selling off on Grexit fears look like bargains. That’s because European economies have been growing nicely, point out analysts at Bank of America Merrill Lynch. Consumer confidence is at its highest level since 2007, and retail sales are strong. Unemployment is falling. Bank lending is picking up. The June purchasing managers index was robust at 54.2, and forward looking parts of it, like new orders, held up. Surveys in June showed continued strong business sentiment in Germany and Italy. And Europe will see a lot more quantitative easing, or central bank purchases of government bonds to shoot liquidity into the economy, and push down interest rates. Whether you like QE or not, it makes stocks go up. And the ECB is only getting started. It says monthly 60 billion euro bond purchases will continue at least for another 14 months. Or longer if needed, to get inflation up to 2%. Unlike the U.S. Federal Reserve, the ECB isn’t even talking about exit strategies yet, dismissing them as a “high-class” problem.