Buttonwood'snotebookFinancialmarkets

Greeceandtheeuro

TakethemoneyandrunJan28th2015,13:28byButtonwood

IFthebroadermarketsstillremainfairlysanguineabouttheelectionofSyriza,thatiscertainly

nottrueofinvestorsinGreeceitself.Theyieldonthreeyear

(http://www.bloomberg.com/news/articles/20150127/asianfuturesdropwhileapplejumps

inextendedtrading)bondsisnowuptonearly17%andGreekbanksharesaredown20%

today(http://www.reuters.com/article/2015/01/28/marketsstockseurope

idUSL6N0V72OA20150128),withthebroaderstockmarketoff8%.

Neitherselloffisanimmediateproblem.Greecewouldn'twanttoborrowfromthemarketsat

currentrates(oreventheratesthatprevailedlastweek)andsharepricesriseandfall.Butboth

developmentsareasymptomofwiderworries.IfthereisanychanceofGreeceleavingtheeuro,

aprocessthatwouldprobablyinvolvecapitalcontrolsandtheforcibleconversionofeuro

depositsintodevalueddrachma(akintoArgentina'scorralito),thenwhywouldyouleaveyour

moneyinaGreekbank?Evenifthatdoesn'thappen,wealthyGreeksmightbetemptedtomove

theirmoneyoverseastoescapehighertaxes.

Thereweresomemodestsignsofcapitalflightbeforetheelection(78billion,orarounda

twentiethofthetotal).ButthatwaswhenSyrizahadanarrowleadandwasexpectedtoforma

governmentonlywithamoremoderateparty.Infact,itscoalitionpartnersareabunchof

antisemitic(http://www.ekathimerini.com/4dcgi/_w_articles_wsite1_1_12/01/2015_546143)

nationalistswhoblameDisraeli(!)andKissinger(http://www.eurojewcong.org/Greece/12087

greekjewsslammpsantisemiticarticle.html)forGreece'spastproblems(theequivalent

wouldbeHollandegoingintocoalitionwithLePen).Sothismakescompromiseless,notmore,

likely.GreekbanksalreadydependonlendingfromtheEuropeanCentralBanktothetuneof

75billion(http://www.ft.com/cms/s/0/3e78cc90a63711e49bd3

00144feab7de.html#axzz3Q7fyQEe4).ButwilltheECBkeeplendingmoneyiftheGreeksreject

thebailoutterms(itsrulesonemergencylendingassistanmcearehere

(http://t.co/ucVgjXn4sK))?Thetroikamaybea"thingofthepast"inMrTsipras'sview

(http://www.economist.com/blogs/buttonwood/2015/01/greeceeuandmarkets)buthestill

needsthemoney.Thiscouldbringthecrisistoaheadwithindays,ratherthanweeks.

"Nationalisethebanks"wastheforthrightresponseofonecommenteronthelastpostandthat

couldbedone,ofcourse.Presumablyitwouldhavetobedonewithoutcompensation(ineuros

atleast)sincethatwouldalsorequiremoney.CallingtheEU'sbluffisanothertacticGreecehas

aprimarysurplus(itsrevenuesarehigherthanitsspending,beforeinterestpayments).Soifit

defaultedonitsdebt,itwouldnotimmediatelyhavetoborrowfromthemarkets.Butallthis

wouldmeanexpulsionfromtheeuroandpossiblyfromtheEUitself,whichisnotwhatthe

Greekvoterssaytheywant.

Butletuskeepthethoughtexperimentgoing.SoGreeceleavestheeuro,adoptsacheap

drachmaandundercutsitsEuropeanneighbours.Intourism,maybe.Butmanycountriesin

thepast(Greeceincluded)havedisplayedapatternofhighinflationleadingtodevaluation,

andacompetitivenessgainthatisdissipatedininflationalloveragain.Andthenthereisthe

budget.Marketshaveforgivendebtdefaultersinthepastbutitstilltakesawhile.Intheinterim,

goingitalonemeansbalancingthebudget.Andthatrulesoutthekindofincreasedsocial

benefitsandhigherpublicspendingthatSyrizahaspromiseditsvoters.

SobacktothemarketsandthegameofchickenbeingplayedbetweenGreeceandtheEU.A

GrexitmightcauseproblemsfortheEUintheformoflossesfortheECBandothersonbad

debts.Butthebigfearin2011and2012wasthatifonecountrywereallowedtodepart,the

marketwouldstartlookingforthenextcandidate.Atthemoment,bondyieldsinSpainand

PortugalarebarelybudgingtheECB,afterall,isabouttobuylotsofgovernmentbonds.Butas

wehaveseenGreekfinancialmarketsaretanking.SoinvetsorsclearlyfeeltheEUhasastronger

handtoplay.