Greece’s latest austerity promise isn’t worth the paper it’s printed on
LONG-TERM investors could be forgiven for putting their hands over their ears at the mere mention of the Eurozone – at the very least it will better assure their continued sanity. But traders are cut from a different cloth and see opportunities in volatility. Despite the relief following the latest agreement for the Greek government to introduce further reforms – which Eurozone finance ministers will consider on Wednesday – in truth, the agreement isn’t worth the paper it’s printed on. Pessimistic realism will return in no time. There will be no Irish resolution for Greece – the people are thirsting for their ancient birthright: direct democracy.
Spread Co’s Ian O’Sullivan says “although the initial reaction in the markets seems to be one of relief that the deal was agreed, that euphoria may well wear out in a matter of days, especially if the protests and riots continue.” Michael Hewson of CMC Markets is adamant that decisions are being driven nearly exclusively by domestic political necessity. He thinks Greek politicians want to be in a position to ultimately blame the Eurogroup, while the Eurogroup are looking for Greece to take the flak.
“The entire Greek drama has been based on the never-never”, says Chris Beauchamp of IG Index, “each time it looks as if the Eurozone will let the Greeks go over the edge, another prime minister manages to pass another austerity bill and they get yet another wodge of cash.” He thinks “the country is probably in a death spiral, as austerity is compounded by depression, and any agreement signed is at the mercy of the politicians who, in their desire to get into power, will abrogate any treaty if it helps them get elected.” Beauchamp says they can then argue that this represents the will of the Greek people, and go back to the negotiating table. As Hewson says: “Ultimately, the Germans won’t keep writing blank cheques.”
As is shown below, Greece is on a slippery slope. Although Joshua Raymond of City Index expects Europe to ratify the deal tomorrow, he says “each tranche of bailout funds will have a huge question mark over it, as the fiscal oversight of Greece is likely to be the strictest it’s ever been.” He also thinks April’s election poses a threat to Europe’s ability to trust the sincerity of Athens to implement these austerity measures.
BANKING ON IT
The €1m question is: what is the threat of contagion? It’s stopping the strong nations from filtering out the weaker and forming their own superior currency bloc and it’s the bargaining chip for weaker nations in their quest to squeeze the German taxpayer until the pips squeak.
Big banks are the big worry, although Beauchamp says “Europe has used its time to inoculate itself against Greece.” O’Sullivan says although “European banks remain vulnerable to a Greek default with billions of euros of Greek debt on their books, the recovery in European banks so far in 2012 suggests that the debts are manageable and contained.” Hewson, a critic of the long term refinancing operation (LTRO) – calling it quantitative easing through the back door – wonders if equities are broadly overvalued. This liquidity boost could help explain the decent performance of banking stocks. Beauchamp thinks “the danger is that European banks will not be able to cope if markets move on to Portugal as the next domino.” GFT’s David Morrison thinks contagion is probable, even with an extended LTRO, with concerns over the stability of the global banking system will return. Ultimately, Morrison thinks precious metals should do well, but notes they could suffer in the short term as leveraged investors rush to close out long positions to raise cash.