So what if it’s totally unclear whether or not a second Greek bail-out will be agreed tomorrow? So what if, after a week of particularly nasty rioting, parts of Athens now resemble a “Mad Max” film-set? So what if the German cabinet, at the highest level, is split on whether or not Greece should default? So what that nobody can possibly know if such a default would be “orderly” or “disorderly”, with global markets remaining sanguine or unleashing months – years – of pent-up frustration?
So what if Greek a payment failure could send bond prices in other eurozone member states plummeting, spreading “contagion” across Western Europe and beyond? So what if the German cabinet’s disagreement over what to do is, in fact, only the sub-plot of deeper political schism between Germany itself and France?
So what if there is no legal precedent for a eurozone member default and no clarity on whether Greece would then be forced to leave the single currency? So what that any Greek exit, resulting in the reinstatement of a blissfully devalued drachma, could encourage agitated voters in other “peripheral” states to push harder for the return of their legacy currencies too?
So what if German President Christian Wulff last week quit under the cloud of corruption, piling even more pressure on Chancellor Angela Merkel? So what if Nicolas Sarkozy could easily lose the French Presidential election to a candidate committed to “reversing” recent eurozone agreements, so upending the Franco-German “fiscal compact” on which this eurozone rescue-plan is built?
So what if the International Monetary Fund, for all the posturing of French supremo Christine Lagarde may be vetoed from bank-rolling the eurozone’s anti-contagion “firewall” by exasperated IMF members? And so what if no-one can agree what “Greek default” actually is, and whether a line can legally be drawn between a “severe haircut” for private sector creditors and a fully-blown “credit event”? This seemingly arcane distinction would determine whether or not a multi-billion dollar string of “credit default swaps” is triggered – itself an event the implications of which could be financially seismic but, again, are totally unknown.
I apologize for this series of awkward questions. Economic commentators are supposed to address dilemmas, rather than pose them. I apologize also for expressing myself in a repetitive, even nauseating way. The aesthetic niceties, though, have been ditched for a reason. For while this equity rally feels good, and as a financial markets professional I hope it continues, the questions above are entirely legitimate and, amid the recent financial euphoria, barely being asked.
Global markets are saying “so what?” and soaring anyway. For two months now, with increasing conviction, bets have been placed on a second Greek bail-out, courtesy of Germany covertly sanctioning the European Central Bank to unleash Anglo-Saxon style “quantitative easing”. Seeing as that would spark, in market parlance, “the mother of all relief rallies”, traders don’t want to be left behind.
In the US, stocks just hit their highest level since the Lehman implosion. The tech-stock Nasdaq is at an 11-year high. The FTSE-100, now at an 8-month record, is also looking perky. Asian equity indices have risen for nine straight weeks.
The reason is that Germany has signaled that at a “make or break” summit tomorrow, it wants finally to strike a deal on the extent to which private sector creditors to Greece will lose money and also on a broader bail-out package. Hopes are sky-high a Greek default will be avoided before a €14.5bn bond repayment deadline in mid-March.
Recent stock market buoyancy, though, has convinced the European establishment – Germany and the ECB – that the impact of any Greek default could be contained. That has cut Athens bargaining power by lowering the “self-explosion” threat, so encouraging EU bigwigs to turn the screws even more.
As such, and with an eye on their domestic electorates, European finance ministers have imposed extra conditions on any Greek rescue. The Athens parliament was ordered to approve a further €3.3bn of austerity measures, the vote being passed last Sunday. Demands have also been met to detail €325m of extra cuts. The final condition, though – that all Greek political leaders provide written guarantees the cuts will happen, whatever the outcome of the next Greek election – caused Athens to see red, resulting in rhetorical warfare and renewed civic unrest.
Suggestions from Germany and other solvent euro-members that Greece accept a technocratic government have generated a slew of “Nazi-era” Greek headlines. Extra restrictions on the government’s ability to spend funds, including the use of restricted “escrow” accounts, have been seen as a humiliation too far. “Who is [German Finance Minister Wolfgang] Schäuble to insult Greece?” hissed Karolous Papoulias, the revered octogenarian President. “Who are the Dutch? Who are the Finns?”
“Politics,” as Otto Bismarck remarked, “is the art of the possible”. As tensions escalate, this Greek bail-out may be unachievable – at least for some time. The Greek economy shrunk at a rate of 7pc during the fourth quarter of 2011. Unemployment is at 21pc. As such, Athens will keep claiming this “teutonic” austerity package is unrealistic. The country’s banking system is paralyzed and can’t issue letters of credit, preventing an export-driven recovery. Deficit-reduction targets, even before they’re further tightened, aren’t being met.
However much everyone wants these tortured negotiations to succeed, the various parties are still a long way apart. The bail-out plan hinges on Greece cutting its debt-to-GDP ratio from 159pc to 120pc by 2020. In recent days it’s become clear, though, that however the assumptions are bent, a figure of 130pc looks a lot more likely. So the ECB has signaled it might further lower interest rates on emergency loans, with “profits” on existing credits being “ploughed-back” into the bail-out fund.
Yet it must still be acknowledged that the numbers, if they are to have any credibility whatsoever, don’t add up. So I don’t expect today’s “eurozone working group” conference call between Finance Ministry officials from 17 countries to solve much. And I’m not expecting tomorrow’s summit to result in a “final solution”
More likely, in my view, is that we’ll see a lot more negotiating “fun and games” before this Greek drama is over. And even if the politic gulf can be breached, and default avoided, will the CDS contract switch be flicked? If it is, panic could ensue given that no-one knows who is holding the ultimate CDS exposures, and to what extent? But if it’s not, investors could equally question the point of the financial insurance such contracts are supposed to represent? This dilemma, barely part of the mainstream discussion of the eurozone’s predicament, could yet move centre-stage.
I fully acknowledge that the economic data from the US is looking better. The large emerging markets are also powering on. But this recent share price rally stems, above all, from the extension of €500bn of cheap three-year ECB loans to the eurozone’s adled banking system, together with the expectation there’s much more to come. Yet such loans can’t go on forever. In the end, financial gravity must prevail.
The current “risk on” trade is largely opportunistic. I don’t know anyone who truly believes a Greek bail-out deal will lead us, decisively and sustainably, into the post-Lehman sunlit uplands. “It will be OK, for now”, is the best that any knowledgeable person can credibly say. Given the hole the Western world is in, perhaps that’s the best we can hope for.