CREDITORS are strange beasts: they appear to have virtually zero memory, to be gluttons for punishment and to embrace rewards for failure. There can be no other possible explanation for Greece’s astonishingly successful return to the bond markets yesterday – apart, that is, from the fact that there is clearly far too much cash burning holes in global investors’ pockets.
Yields available elsewhere remain desperately low, in part because of our obsession with never-ending ultra-loose monetary policy, and investors hungry for decent returns are thus falling over themselves to lend to a country barely out of bankruptcy. Lenders accepted a yield of just 4.95 per cent in return for five-year bonds, trading extra risk for extra return with wild abandon and the kind of mindset that helped lead to the financial crisis.
Around 550 investors bid an extraordinary €20bn for the bonds, and the Athens government raised €3bn.
Imagine that you were a badly-managed, profligate country. You would be jumping up and down with joy at this news. Greece remains in dire straits, despite its bailouts; its national debt is an unsustainable 175 per cent of GDP. It was just two years ago that private investors lost a fortune when €130bn worth of Greek debt was restructured – and yet all of this has now been forgotten. It’s shocking stuff and indicative of the apparent short-termist stupidity of too many market participants.
It is, of course, excellent news for ordinary Greeks that their government appears to be getting back to normal, at least for now; let’s hope that this helps put their economy back onto a firmer footing and that the growth and jobs start to return. The Greek public has suffered immensely in recent years and has undergone a catastrophic collapse in output and living standards.
But sadly that’s not the end of the story. The problem, long-run, is that the kind of insanely indulgent attitude from the global markets we are witnessing causes extreme amounts of moral hazard. One reason why countries seek to behave and live within their means is that they fear that the borrowing costs they would face if they default would shoot up, and that they would be treated as pariahs and locked out of the global markets.
If that threat goes away, and bankers decide to throw good money after bad, countries will soon realise that defaulting on their debt will be at worst a temporary inconvenience. They will become less likely to pursue prudent fiscal and monetary policies and global risk will rise. This vicious circle is at least in part the unintended consequence of the ultra-loose monetary policies being pursued by Japan, the US, the UK and the Eurozone. When money is too easy to come by, even the prudent lose their heads.
THINKING OUTSIDE THE BOX
MOST companies have a bland or predictable worldview. Not so Legal & General, the insurance giant. It has developed a sophisticated analysis of our current economic challenges, highlighting the lack of housing supply and the side-effects of QE.
It points out that consumers are enjoying a £22bn transfer from PPI compensation payments, that home-owners have pocketed £28bn in mortgage interest savings thanks to low interest rates and that many have paid nothing for their homes over the years, with interest payments lower than cumulative capital gains. It doesn’t want to invest in HS2 or energy projects whose viability is based on gross over-pricing and thus aren’t in consumers’ interest, such as offshore wind.
Instead, L&G wants to build more homes – and is especially interested in last-time buyers, arguing that the private sector needs to build a new generation of special properties for retirees, allowing them to rightsize and sell their family homes to younger buyers. It’s certainly a far more interesting analysis than the dross one normally hears from other big corporates.