Markets calm, but concern now switches to referendum
From an Irish perspective, the Greek crisis has so far been benign. The euro yesterday bought 70.8p sterling, close to its three-month low, but down from 80p a year ago.
The Greek crisis and interest rate differentials mean that exporters into Britain have had a huge boost to their competitiveness — the euro is 11.5% cheaper when it comes to selling products and services into Britain in the last year.
The huge upset that some had expected did not materialise in sovereign bond markets either — for the time being. Money flowed back into German bonds, pushing the cost of the eurozone power-house lower and out of indebted eurozone countries, including Italy and Portugal.
Finance Minister Michael Noonan can also smile. The 10-year bond of Ireland — another indebted eurozone state — ended the day little changed despite the weekend’s shock developments, at 1.66%.
The largely muted reaction of gold buyers also suggested that the eurozone powers are having their way in isolating Greece. Gold is much sought in times of market crisis and panic, but gold futures rose only slightly to $1,175.90 an ounce yesterday. In all, the markets’ reaction will give the politicians some comfort ahead of the Greek referendum next weekend. Longer term, however, no one can be sure.
Ashoka Mody — the former IMF official who was here in the early days of the Irish bailout as the IMF mission chief in 2010 — has warned that the eurozone politicians cannot be as sanguine in the coming weeks and months. No one can be sure that the mood of the bond markets will change.
As Ireland found over five years ago, bond markets can change their views quickly. For those long-term market watchers, it is striking how little the commentary has changed. Back in the day, the cliché was about the partying Irish after the boom now facing a hangover when this state was forced out of debt markets. A few months later, The Wall Street Journal bizarrely targeted the relatively large level of secondary school dropouts in Portugal to explain that country’s slide into its bailout. Cyprus was, by common agreement, bulging with Russian hot money, while Greece, we are repeatedly told, is lazy and corrupt.
Eurozone leaders and the IMF will be content with yesterday’s market reaction. As the reaction pieces from commentators below show, it is probably much too early to assess what the markets are going to do.
Just when you think that things can’t get any worse for the Greek people, they do.
The closing of Greek banks this week following the breakdown in negotiations over the weekend will further depress confidence and spending in the Greek economy and deepen the recession. Without a restoration of growth, the problems of over-indebtedness, unemployment, and social unrest will get worse.
Syriza won elections last January on a promise to improve the lot of Greek citizens. Six months later, the situation for most people in that country continues to deteriorate. Without a programme of financial support, Greece faces more austerity in the months and years ahead, not less.
For sure, Greece’s creditors must recognise that Greek public debt is at unsustainable levels, but Syriza has failed to engage with the international community in a meaningful way and has yet to draft a credible National Recovery Plan that will put the economy on a path to growth.
There is still scope for a deal to be struck between Greece and the creditors to avoid the uncharted waters of a Greek exit, but the breakdown in negotiations has made this much more difficult.
There can be no shirking the need for further significant reforms to the Greek economy, to ensure it has a viable and sustainable future. A key element in reaching that future is also delivering an agreement which is pragmatic on how much future debt the Greek economy can bear.
Given Ireland’s limited exposure to the Greek economy, the immediate direct economic impact of a Greek exit here would be minimal, and the debt writedown losses incurred by the eurozone would also be relatively small.
‘Grexit’ would, however, impact on the market risk perception of other indebted eurozone members and it is positive to see that, unlike some other countries, Ireland’s bond yields have so far experienced no real collateral damage.
The Greek crisis is taking up a huge amount of political energy and resulting in other important economic priorities of the EU slipping down the agenda. A definitive resolution is urgently needed.
Greek banks are shut but they are not bust. In 2011, we had governments shut out from funding because of the failure to handle bank losses. Now Greek banks can’t get funding because of the failure to organise the government finances.
This failure is political and diplomatic rather than purely economic. Yes, unlike Ireland’s, Greek public debt is not sustainable. Further extensions and reductions in the servicing costs are necessary but not key to getting the Greek economy functioning again.
Greece has introduced massive austerity over the past five years and is close the funding itself on a day-to-day basis but they are not there yet. Greece can have an expensive pension system and other services but they cannot expect other taxpayers to pay for them. The current impasse seems to be about bridging this relatively small, gap.
A deal should be possible, but the political posturing of both sides means we have a belated referendum without a clear question in Greece and the other governments holding a hard line.
There is little to be gained by Ireland beating a drum about how we used different solutions to solve different problems. The die is not yet cast on ‘Grexit’, but that is where we are heading.
How did we get here and how do we get out? The failures of EU member states and institutions in dealing with Greece are substantial, centring on their unwillingness to acknowledge their part in creating the Greek crisis and their failure to address the unsustainable Greek debts.
The incapacity of successive Greek governments to play their part, and the sheer ineptitude of the current Greek administration have now brought matters to crisis point. Let historians apportion responsibility.
Today, however, we have a foul maelstrom of finance, economics, politics, law and personalities in which the Greek people are drowning before our eyes. Having abdicated their responsibility to govern, the Greek government has demanded that the Greek people fashion their own lifeline.
If our ‘union’ is to mean anything, it must respond to this crisis with imagination and determination. It must be made clear that a yes vote in Sunday’s ill-conceived referendum will deliver a sustainable future for Greece. It should also make clear that a no vote will be respected but that this expression of Greek democratic will does not trump those of 27 other member states. A union of states and peoples can do no less.
Events in Europe over the weekend are close to the worst possible outcome for Greece and the eurozone and have taken markets, who expected an eventual amicable deal, by surprise.
The unilateral announcement by the Greek government to hold a referendum on, what is to all intents and purposes, its participation in the eurozone, has all but collapsed the Greek banking system with only ECB support, albeit frozen at Friday’s levels, staving this off.
The resultant capital controls make it very difficult for Greece to pay for imports on which it relies which raises the spectre of food shortages and social unrest. For the rest of Europe, questions about the irreversibility of the euro have ratcheted up a notch.
The focus is now on the ECB’s ability to contain the fallout in markets which has seen the euro fall and peripheral bond yields rise, although Irish yields are stable.
Events have brought Greece closer to an exit from the eurozone. European politicians have been blindsided by Greece in this crisis and need to get their act together quickly to keep the single currency project together.
If Greece leaves the euro, the future of the eurozone will be put into serious doubt, which in turn will have serious ramifications for European financial markets. I still can’t make out if Greek prime minister Tsipras is a brilliant strategist or just plain stupid/naive.
However, what is clear is that his erratic behaviour has completely caught the official creditors off guard. Mr Tsipras is taking a huge gamble with the referendum on July 5, and it is hard to know how the vote will help. Eurozone leaders are in a bind.
Both the creditors and Greece will need to adopt a more ‘middle of the road’ approach. That said, this is now a political crisis not a markets’ crisis. However, should Greece leave the euro that would increase the chances of Britain voting to leave the EU, which would have far more serious consequences for Ireland down the road than a Greek exit.
Bookie Paddy Power is offering odds of 13/8 on the country exiting the eurozone this year. More immediately, Greece is odds-on at 1/2 to approve the creditors’ bailout terms and it is huge odds-on at 1/7 that there they clear the 30% turnout figure required to make the vote valid at a referendum.
The bookie is also taking bets on when the banks will open with July 6 the odds-on favourite at 4/6 while July 7 or later is a 11/8 shot.
Finance minister Yanis Varoufakis’s position has the stability of a three-legged table — he is even money to stand down by the end of July in the face of a yes vote, according to Paddy Power.
Will Greece approve their creditor’s bailout agreement terms? 1/2 yes (accept new credit terms from institutions, ECB, IMF.) 6/4 no (accept Greek government proposals).
How do you solve a problem like Greece? By calling a referendum following a week of fruitless discussions, prime minister Tsipras has decided to up the ante.
Seasoned poker players know that this strategy makes sense if you have a strong hand, but the only card Greece seems to have to play is that its debts are too large for the EU and IMF to simply walk away from.
Thus an accommodation seems likely to be reached. In the short term, capital controls and an extended ‘bank holiday’ have heaped more pressure on Greece’s beleaguered citizens and businesses.
Polls suggest that a clear majority of Greek voters are prepared to trade more austerity for keeping the euro. Signing up for this is likely to be unpalatable for Mr Tsipras, so don’t be surprised if a new (possibly national) government is formed to bridge the gap between borrower and lender.
After a volatile opening, bond markets calmed considerably, but there was a discernible pattern to the trade: money moved out of sovereigns such as Portugal, Spain and Italy and into the core eurozone bonds, including Germany.
Ireland’s bonds, meanwhile, remained largely unchanged.
Eurozone politicians will be pleased if markets continue to hold a ‘holding pattern’ in advance of the Greek referendum. The Ireland 10-year bond finished at 1.66%, more or less unchanged from Friday. Spain’s 10-year bond ended at 2.34%, up 24 basis points, while Italy finished at 2.39%, also 24 basis points higher.
Meanwhile, the yield on the German bond fell to 0.80%, down 13 basis points since the weekend.
The mess in Greece was avoidable, and blame aplenty exists for all to share.
The Troika’s refusal, even in the face of overwhelming evidence, that the course on which it was taking Greece was self-defeating, deserves contempt.
Its inability to admit that the bailout in 2010 was botched, in letting private sector creditors away and shifting the burden to the state, deserves even greater contempt. The naivety of Syriza and the calamitous governance of the Greek state over decades, mostly by those now hopping up and down in the sidelines, adds to the mess.
A solution is of course available. Compromise involves both sides losing, but for good reasons. Right now we have both losing, for the worst reasons. The result is that the euro — never a true union — is dead. The currency is now best seen as a hard currency peg. Stormy times ahead.
The Greek situation resembles Ireland’s as foreign banks and private investors who gambled their money have in fact been bailed out by the taxpayer.
This process in itself was unjust when it was imposed on Ireland and it remains unjust now that it is being imposed on Greece.
The moral hazard situation, whereby banks and investors can gamble their money but be assured that if they lose then they will in turn be rescued by the taxpayer, is a disgrace. Yet this injustice has not been addressed by the EU, the ECB, or the IMF.
The EC and the Council of Ministers need to take a long-term perspective, realising that there are serious economic, social and environmental challenges that must be addressed.
Imposing more austerity and further undermining the economy will simply worsen the situation. European values were undermined during Ireland’s bailout. They are currently being undermined in the case of Greece.
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