I don’t know about you, but I try to avoid giving binding commitments at 2:00 in the morning. Agreeing to anything important when you’re that tired and grumpy and had that much to drink is just asking for trouble.
Yet European leaders seem to be in the habit of concluding big bail-out deals in the wee small hours. It’s the ‘last negotiator standing’ tactic. Everyone gets so fed up and tired and has invested so much time and energy that they’ll agree to anything, just to get back to bed.
And that’s how, this morning, Greece was saved – again.
Greek citizens can look forward to years of grinding austerity and resenting Germans. Their debtors can look forward to writing off even more of their debts in the not-too-distant future.
But Europe is intact. And that’s what matters. Isn’t it?
Yet another ‘make-or-break’ moment for Greece
“Everyone understood that this was the moment of truth,” said Belgian finance minister Steven Vanackere at this morning’s Greek deal press conference.
Maybe ‘truth’ has a different meaning in Belgium. We’ve seen so many ‘moments of truth’ in the eurozone crisis that we’ve lost count. So what’s the latest one all about?
Greece is to get €130bn in aid. This is all meant to get Greece past a big bond redemption (in other words, when it’s due to repay a load of its debt) next month. Private sector bondholders have agreed to swap the bonds they hold now, for new ones. This will involve a ‘haircut’ of 53.5% on the face value of the bonds, up from the 50% agreed in October. They’re also set to get a lower interest rate on the new bonds than they’d previously hoped.
In exchange, Greece has agreed another €325m in spending cuts. There will be a permanent team of monitors in Athens, watching the nation’s finances. Greece will have to hold three months’ worth of debt payments in an escrow account, to make sure it prioritises paying off its debts and doesn’t blow the lot.
Here’s where the problems start. After every ‘grand package’ announced by Europe, the loose ends are quickly revealed, and just as quickly, start to unravel. As noted above, that’s because these ‘deals’ are agreed at 2:00 in the morning, when no one is in a fit state to commit to anything.
Firstly, private sector bondholders need to agree to swap their bonds for the new ones. Secondly, Greece needs to suck up yet more austerity – so if there’s anything flammable left in Athens, don’t expect it to be there for much longer. Thirdly, every other government in the eurozone needs to approve the deal too.
Assuming this does all get passed, then Greece won’t go bust next month hopefully. But the chances of it ever getting back to any sort of sustainable debt position under current circumstances are frankly non-existent. The best-case scenario is for debt-to-GDP to come in at 120.5% by 2020. That’s if everything goes according to plan.
But do markets care?
So Greece is still doomed to default. It’s just a matter of time. But do markets really care anymore? The bail-out news didn’t make much difference to them, which suggests they’d already priced it in – or that they simply weren’t worried, regardless of the outcome.
Perhaps that’s understandable. Mario Draghi at the European Central Bank (ECB) has made it clear that he won’t allow banks to run out of money on his watch. The ECB is effectively doing quantitative easing, whether it admits it or not.
So chances are, we’re not going to have a Lehman Brothers moment in the eurozone. Banks have now had long enough to offload their exposure to Greece, and any other weak links, onto the ECB (and ultimately, the German taxpayer). And the ECB has shown that just like every other developed world central bank, it’s happy to print money. Hence the recent rally.
But we’d be wary of getting too excited about all this. Politics is of course, always going to be an issue. The markets are currently pricing in a ‘muddle-through’ scenario, where there’s the occasional hiccup, but the ECB smoothes everything over by printing money when needed.
If Greece gets fed up and votes for an anti-Europe party; or Germany does the same; or any of the other 15 countries in the eurozone do something similar; panic could return. And if the ECB becomes more hesitant about printing money, that’d probably be even worse.
But the real problem for now – as James Ferguson noted in a recent issue of MoneyWeek magazine – is that the European economy is going to endure a miserable time as banks embark on a much-delayed repairing of their balance sheets. This is a project that British and American banks started on far earlier than Europe’s did. And we’ve hardly had a pleasant few years.
With Europe’s banking system tightening credit, and the economy shrinking, that has to have a knock-on effect to the rest of the world, not least of all China. In the next issue of MoneyWeek – out on Friday – our roundtable experts look at the best ways to play the current market rally while protecting yourself from the potential downside. You can subscribe to MoneyWeek magazine.
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