The scale of market activity based on unfounded chatter demonstrates just how jittery the markets are. The size of Greek bond yields are such that a default seems almost inevitable, but on top of that, every time that the ECB thinks that it has one problem dealt with, another one pops up like a whack-a-mole at a fairground. And each and every time that another problem returns, it makes it even more obvious that Eurozone policy needs to be overhauled. As UBS economist George Magnus points out: “The immediate problem, which policy makers have been unable or unwilling to address successfully, is the negative feedback loop between diminishing sovereign creditworthiness and weak, undercapitalised banks.”
So will tomorrow’s conference be the start of a move towards ending this vicious cycle? Some analysts, such as CMC Markets’s Colin Cieszynski are cautiously optimistic that we are starting to see moves in the right direction: “Perhaps the most interesting comment of yesterday came from German Chancellor Merkel, who indicated the need to avoid ‘uncontrolled insolvency’ for Greece and to keep the process orderly to avoid contagion.” Cieszynski suggests that the talks may be setting the stage for a controlled restructuring of Greece, similar to the managed bankruptcies of GM and Chrysler back in 2009.
But this suggested similarity throws up an interesting point. While the US has legal structures in place to allow municipalities to file for bankruptcy under Chapter 9 in the same efficient way that a business can under Chapter 11, the EU has no such system. As such, the Greek problem threatens to cause a domino effect, taking one country after another down with it.
Other analysts do not share Cieszynski’s optimism. “I think little, aside from general platitudes, will emerge from the call,” says Michael van Dulken, head of research for Accendo Markets. “There will be the usual stuff about making sure Greece keeps its commitments, and the willingness of the Eurozone to help, but probably little else.” Whatever Papandreou says in his attempts to placate his European comrades, his countrymen are showing little sign of trying to drag their country up by their collective bootstraps – although the government has introduced a new property tax, the tax collectors have gone on strike.
UP THE STYX WITHOUT A PADDLE
If triple figure yields on Greek bonds are not enough to trigger a rethink of Eurozone policy, one has to ask: what is? And what possible shape would this restructuring take? “EU ministers, in desperation to prove the euro is not a failure, decided to throw huge amounts of taxpayers money to save a member that had broken the rules,” says Jordan Lambert, a trader for SpreadEx. “The only way Greece was ever going to drag itself out of this ugly hole, especially as the euro appreciated through excessive Chinese buying, was to leave the euro and return to the drachma and rebuild their economy through exports.”
FORK IN THE ROAD
As it stands, it appears that only a Greek default, or at least an utterly unavoidable event, will trigger a shakeup of policy. And the likely outcome of that is a move in one of two directions. Full fiscal union is one, or the other outcome, according to Chris Beachamp, research analyst for IG Group, is a split into a “strong euro” and a “weak euro”: “The former being Germany, Finland, Netherlands, Austria and possibly also France, and the latter being southern Europe. I think the possibilities are evenly balanced.” Europe’s politicians have invested a lot in this currency union, and will not want to see it go. But Beauchamp points out: “Events and popular discontent might move too fast, and force a split into two halves.”