Search for Greek resolution a game of bluff
WE could be entering the first really choppy period of the New Year for investors as we watch for some kind of resolution with Greece.
Nearly everyone I speak to assumes that Greece will get the minimum amount it needs to stave off a disorderly default, simply because Europe is not yet confident enough to cut it adrift. It’s deemed cheaper to keep giving it the money than risk the financial consequences of a feedback loop into a still fragile Eurozone banking system. But at some point someone’s bluff will be called.
As a result equities start this week after the biggest weekly decline of 2012 and a spike in the volatility index the VIX – above 20 for the first time in nearly a month. Still it comes after a good run. The Dow’s up 20 per cent since 3 October, the S&P up 22 per cent and the Dax up nearly 30 per cent. These upward moves have pretty much cancelled out earlier falls.
So what next? To some degree that may depend on more central bank liquidity. The Fed is keeping the window open on more QE but officials like Jeffrey Lacker are not keen.
Here in Britain many wonder if last week’s extra £50bn from the Bank of England will be the last. Capital Economics says “no” and “even it is reaching a limit on how much of the gilt market it can buy, there are plenty of other forms of unconventional policy that it can branch into”.
Fathom goes further. It wants the Treasury to set up a “bad bank” to buy troubled mortgage-backed assets weighing down commercial banks’ balance sheets, then allow the bank to issue bonds backed by those assets, which the MPC would buy via QE.
But of all liquidity actions perhaps the biggest response has been to the ECB’s LTRO programme from 21 December, particularly on Eurozone bank stocks. The second LTRO is at the end of the month, and now the ECB has loosened collateral rules even further, expect bumper demand. But it’s unlikely to have as broad an impact on risk assets as the first, simply because in December we feared a systemic collapse and so were coming off a much lower base.
We’ll also realise that the liquidity is there for a reason. The programme of bank resolution has only really just started in Europe. Banks are moving out of risk assets into risk-free assets of which there are only two: short-dated government securities or money on deposit at the ECB. The central bank will do its best to discourage it but I fear we’re going to be here for some time to come.
Ross Westgate co-hosts Worldwide Exchange daily on CNBC and also anchors Strictly Money — www.cnbc.com