The ongoing fiscal meltdown in Greece has become something like watching a really bad action flick. The required damsel-in-distress (in this case named Greece), yelping and screaming from scene to scene, barely survives repetitive attempts to do her in by assorted bad guys (in this case called speculators), until some hunk with a lot of hardware (in this case, hard cash) swoops in and rescues her. We all know how this movie is going to end, so we might as well press the fast-forward button on the DVD player, get to the final act, and save us all a lot of trouble.
That’s exactly how I feel about Greece. There’s no real drama left in the Greek financial crisis. Greece needs the cavalry to charge over the horizon, the hero on a gleaming white horse to appear in the nick of time, Arnold to show up with his giant machine gun…(just add in your own cliché here).
So let’s just get it over with already.
The saga over Greece’s precarious financial state has been following a predictable pattern. First, markets become more and more nervous about a Greek default, causing the yields on its bonds (and thus its borrowing costs) to rise, while drop-kicking the euro at the same time. That wakes up the rest of the Eurozone from its attempt at languishing in denial; a bunch of EU ministers get together for a chat and make some supportive statements or pretend that they’ve agreed on some kind of rescue plan, without, of course, committing any actual euros. That calms markets for a short time until investors realize they’ve been conned and no real support is imminent. Renewed panic sets in and we start all over again.
Forgive me for yawning.
That’s exactly what happened over the weekend. After Greek borrowing costs reached their highest level in more than a decade last week, EU ministers agreed on the details of a rescue package, in which Eurozone members would, if needed, offer Greece up to $40 billion of emergency loans at a below-market interest rate. By Monday, markets had again calmed, confident in the belief that the EU would step in and prevent an outright Greek default.
But for how long will investors be appeased? Is this a final resolution, one that will stabilize bond markets in Europe and allow Greece (and other debt-burdened Eurozone nations) to finance their deficits and rollover debt? Or is this week’s lull just the tip off for another (predictably boring) cycle of the crisis?
I fear we’re far from an actual solution to the Greek crisis. Though this weekend’s EU deal told us more about how a rescue would work, it didn’t tell us when, or under what circumstances, the Eurozone would feel compelled to turn on the money spigot. All 16 members of the Eurozone would have to agree to activate the package before Greece would get any loans. There’s a chance then – and a good one, I believe — that in a short time, investors will again get the jitters and we start the whole cycle all over again.
And even if this weekend’s agreement does the trick – stabilizes markets enough to allow Greece to avoid default – it won’t necessarily solve Greece’s long-term financial woes. The Greek government faces a Herculean task to fix its financial house, and its bold austerity measures are facing entrenched resistance from certain elements of society (mainly public sector employees). That means uncertainty about Greece will persist in global financial markets for who knows how long. Here’s what Financial Times columnist Wolfgang Münchau had to say on this issue:
It is important to distinguish the near-term insolvency as a result of the failure to roll over existing debt, and the country’s long-term solvency position. This (recent Eurozone rescue) deal, I am confident, will solve the first issue. As I predicted last week, Greece will not default this year. But I am still sticking with my second prediction that Greece will eventually default. The numbers simply look too bad. The adjustment effort Greece is asked to make will be one of the largest in history… It is impossible, at least for me, to imagine a situation in which Greece can manage to extricate itself from a pending catastrophe without some debt restructuring.
What Greece requires is a final, comprehensive, far-reaching plan to map out the resolution of its financial mess. Perhaps Greece needs an old-fashioned International Monetary Fund-sponsored debt restructuring, in which Greece gets loans in return for fiscal reforms. (The nations of the developed West have shown little hesitation forcing developing countries into such programs, as they did during the 1997 Asian financial crisis for example, but they suddenly get queasy with the thought of imposing the IMF on one of their own.) The Eurozone is trying such a reform-for-cash approach right now, probably with IMF involvement, but it’s unclear how Europe would enforce such a system on its own. What’s needed is a credible bailout with an equally credible reform program in Greece.
I fully appreciate why Europe’s governments are wary of taking such drastic action. It means risking the politically unpalatable step of bailing out a profligate neighbor and setting a bad precedent stuffed full of moral hazard issues. Perhaps the drip-drip-drip method of dealing with the Greek crisis will work, by buying the administration in Athens time to get its finances in order.
But recent months show that promises alone may not cut it. Until investors are sold on a fundamental solution, currency and bond markets will remain nervous, and the risk will remain that the Greek problem could become a general Eurozone problem, as other wayward members (such as Portugal and Spain) could fall into the same debt trap. (And then, who knows what might happen from there?) Whatever the Eurozone does with Greece, it must make clear that that would hold for other members suffering with Greek-style debt pile-ups. Here’s more from the Münchau
It is evident that whatever will be agreed will only apply to Greece. The EU has still not provided a generalized crisis resolution regime. I suspect that smart investors know that.
This first episode was awful enough. Please don’t make me sit through any sequels.