Greek drama poses long-term risk for euro Roger Blitz ©EPA Europe has no safe route in dealing with Greece's debt crisis Jokes about the eurozone were all the rage four years ago, at the height of the debt crisis (“A Greek, an Irishman and a Portuguese go into a bar and order a drink. Who picks up the bill? A German”). Black humour has been less in evidence over this year’s Greek saga. Is it because the consequences of default and Greece’s exit from the euro are deadly serious, or because the market is confident that the prospect of eurozone contagion will be limited? Both theories may be true. Investors are broadly satisfied that the short-term impact on the eurozone has been neutralised and the structure of the euro can be maintained. Bank risk is a fraction of the levels of 2011, and trading in the euro as the latest crisis intensified suggests investors have for the most part largely ignored Greece. But in the long term, they worry that Greece, whether it stays in the euro or not, has exposed the fundamental flaws of the single currency, and that the crucial concept of eurozone membership, that it is irreversible, has been fatally undermined. What happens the next time a eurozone member risks breaching the rules of the club, wonders Paul Lambert, head of currency at Insight Investment. “In the short term the market seems to have decided to return to business as usual,” he says. “Longer term it is also now clear that when a country is on the ropes and needs to be supported by its euro partners, then the threat of a mutually damaging euro crisis seems to be an acceptable weapon from both sides and that means the euro is not a monetary union in the purest sense.” By kicking the Greek can down the road, Europe’s leaders may have merely heightened market sensitivity to the next political crisis. According to David Riley, partner at BlueBay Asset Management: “The next time it looks like we are going to get an anti-establishment party coming to power in France or Italy or Spain, investors are going to be very, very nervous”. General elections take place in December in Spain, where the radical left-wing party Podemos has been polling well. It looms as a test of the Spanish public’s support for its government’s adoption of structural reforms demanded by the eurozone institutions. The Spanish economy is expected to grow by 2-3 per cent this year, but unemployment hovers near 23 per cent. Will economic recovery in Spain and other peripheral eurozone countries be deep enough and sufficiently sustainable to mitigate political risk? Ugo Lancioni, currency manager at Neuberger Berman, says the eurozone is “in a race” to achieve recovery before anti-establishment parties can harden their support. “It’s going to be about wealth and the perception of recovery,” he says. The social and political consequences of the recovery may be severe. But structural reforms are the only way to make the single currency resilient, says Stephen Jen, head of currency hedge fund SLJ Macro. Right now, he says, “the EMU is brittle”. Formed in 1999, the euro enjoyed a decade of relative stability until the debt crisis erupted in 2010. It is not the current crisis, but the 2010-12 version that first damaged the principle of irreversibility, says George Saravelos, strategist at Deutsche Bank. “From the perspective of redenomination risk, the latest Greek crisis has not seen a material repricing of these risks. Underlying worries around re-denomination are likely to remain so long as political risks remain in Europe,” he says. In a global economic climate showing signs of recovery, there is more than enough interest elsewhere to keep investors preoccupied with matters other than Greece. In many ways, Greece is unique, says Ralf Preusser, rates strategist at Bank of America Merrill Lynch. He argues that its dependence on external financing and its unsustainable debt should not make investors more or less nervous about the future of the euro area. “The trigger for a spillover in my mind would be the next recession when we could possibly recreate Greek circumstances elsewhere, but this doesn’t strike me as a near-term risk,” says Mr Preusser. But the medium term is the nagging concern. The market appears supportive of the European Central Bank’s quantitative easing programme. Société Générale strategist Kit Juckes says QE has effectively “smothered” risk premiums. But what happens to risk premiums after QE, he asks. “We’ll have to find out where private sector investor demand for European assets sets prices in a system whose structural flaws have been exposed and whose leaders’ inability to provide structural reforms for those flaws is clearly lacking,” says Mr Juckes. That is no laughing matter.
#Greece regime change near-certain once ECB stops bank support. As expected #Tsipras has committed political suicide
Tsipras has earned his punishment The Greek people are enduring the consequences of their prime minister’s childish misbehaviour ©Getty European and international officials have required thick skins this year. In Anglo-Saxon countries, they are daily lampooned as economic illiterates who caused the Greek economic crisis and have asphyxiated the economy during the past five months of negotiations. Now they are harangued by Alexis Tsipras as “extremist conservative forces” who are supposedly “blackmailing” the Greek prime minister’s downtrodden people. Stop. Little could be further from the truth. The cause of Greece’s misery was many years of homegrown economic mismanagement and fiscal profligacy masked with lies over its accounts. When the global crisis exposed its economic misdemeanours, it lost the ability to borrow from financial markets and sought support from the international community. This was granted, largely by its European partners, ensuring much less austerity in Greece than any plausible alternative. Sure, the motives of creditors were not purely altruistic, but the money was lent with the aim of helping the country secure a better present and future. Greece has achieved much since receiving the bailout loans, reducing budget deficit from 15 per cent of national income in 2009 to 3 per cent in 2014. It has implemented many necessary economic reforms; and the programme began to work, with Greek output growth topping the eurozone league table in the third quarter 2014. This progress was made despite Greece persistently failing to implement fully the reforms to which it had agreed. Deploying the kind of tactics that would shame student politicians, the Syriza government has thrown all this hard-won progress aside in an attempt to extract more money from other European countries. It initially asked to reverse spending cuts and tax increases, backtrack on economic reforms and receive a huge debt writedown. There was never any chance of the creditors funding a wishlist that contradicted the democratic wishes of all 18 other eurozone countries. The Syriza-induced stand-off has pushed the Greek economy back into recession. Saying no to a blank cheque did not mean the creditors were simply unreasonable. From before the election, they have offered more money, more favourable terms and the prospect of debt relief if Athens keeps its side of the bargain. Debt relief has become another unnecessary sticking point in the negotiations. On Thursday, Yanis Varoufakis, the Greek finance minister, said he would prefer to cut off his own arm than sign a new deal without debt restructuring. Let us be absolutely clear about this. Greece has already benefited from massive debt restructuring. The face value of its debt might be 175 per cent of national income, but it faces a lighter interest payment burden than Italy, Spain and Portugal (and one barely heavier than Germany’s). As Klaus Regling, head of the European Financial Stability Facility, said this week, Greece has already received by far the most generous lending conditions ever granted to bailout countries. The EFSF loans have an average maturity of 30 years, and for the vast majority of these loans Greece enjoys a grace period on interest and principal payments until 2023. In another act of solidarity, creditors have made it perfectly clear that further debt relief will be on offer once Greece implements the lending conditions to which it says it agrees. This is a perfectly sensible attempt to reward good behaviour on the principle that you do not give treats to a misbehaving child. None of this is good enough for Syriza. Mr Tsipras is calling on the Greek people to vote against the offers made by the creditors in Sunday’s referendum, hoping that the terms will magically improve. His explicit threat is to bring everyone else in the eurozone down with him should creditors decline to meet his demands. They will refuse, and rightly so. Greece’s default against the International Monetary Fund did not spook markets as Mr Tsipras must have hoped, but the capital controls he has been forced to impose have added an even greater burden on long-suffering Greek citizens. So it will continue. The longer Syriza pulls fresh stunts, the more pain Greece will suffer — with the danger that Mr Tsipras will lead it out of both the eurozone and the EU. Contrary to the widespread belief that such a result would be a disaster for the euro, it would reinforce the message that membership confers rights and responsibilities, and that there are consequences for countries that abuse this delicate balance. Alternatively, Mr Tsipras could sign up to reasonable lending terms that have been available since the start of the year and the prospect of further debt relief once conditions are met. Having lost so much trust among the creditors, this is now the more difficult path. Europe will not crow and make it impossible for him to take this route, but it will require Mr Tsipras and Syriza to show some leadership and to ditch the victim mentality. chris.giles@ft.com
The German Press Does It Again: "Give Me The Money Or I Shoot" When a message needs to be sent by the powers that be, the German press can always be relied upon to send it, no matter how divisive (as they did here, here, and here). So it is no surprise that with the stakes appearing to have never been higher, Handelsblatt unleashes the following... Translated: "Give Me The Money Or I'll Shoot" Not to be confused, of course, with "Ich Sheisse". Of course, this is how some Greeks responded: https://twitter.com/srokkos/status/616724304252809216