Maybe I’m too deep in the weeds, but the whole charade between Greece, Germany and the rest of the EU seems like a case of ‘truth stranger than fiction’. Here’s what I gather so far, mainly from reading Bloomberg and a Twitter stream full of insightful people (NB: once started with Twitter, it becomes extraordinarily addictive; not unlike financial markets):
- Greece survives due to the largesse/pleasure of creditor countries within the EU. Remember who has the power? If the credit tap is turned off, Greece will default. Bank deposits have fled the country so fast, there is no chance to finance itself in Euros. Simple as that.
- The timeline is a bit fuzzy, but seems to be end-February. If nothing is done before then, Greece is a goner.
- If Greece defaults, the following is likely:
- A very uncertain time, as folks attempt to figure out how an ‘orderly exit’ from the Euro could take place – there is no template, nor legislation, for how this would work.
- Bond yields for other countries surviving on EU credit, e.g. Spain, Portugal, Italy, will likely spike higher. Who’s to say they won’t be ejected as well?
- I’m unsure what happens to the Euro. I suppose it depreciates, as event risk becomes more of an issue.
- Greece’s government has the explicit (perhaps necessary and sufficient?) mandate to exit the current bailout arrangement while maintaining Euro membership. Though the campaign speeches said this would be easy, it’s turning out not so easy to achieve both objectives.
- In my opinion, Greece’s ace up its sleeve is Yanis Varoufakis, the Finance Minister. He used to teach game theory, which one would assume is very useful for this type of goal achievement. His methods have been definitely interesting to watch/read:
- Rhetoric completely shutting down the possibility of extending the status quo. In other words, things will definitely change.
- Pointing out the damage a Greek exit would cause for the EU. A sort of “don’t cut your nose to spite your face” argument.
- Proposing relatively new financial instruments – e.g. GDP growth-linked bonds. A good idea, but controversial for moral hazard-concerned creditors.
- Continuous confidence in a solution which will suit Greece. Establishing the inevitable.
- Once negotiations began, Germany’s hard-headed Finance Minister, Wolfgang Schäuble, played the ‘bad cop’ in excellent fashion. Basically shut the door on any extension that varies the terms of the previous bailout. Doesn’t care about fallout – he announces all is OK.
- In the middle are Michel Sapin, France’s Finance Minister, and Jeroen Dijsselbloem, the Dutch Finance Minister. They’re obviously trying to mediate this clash of titans, hoping to navigate the two most extreme outcomes:
- Unconditional Greece win: extremist parties in Spain and elsewhere win elections, then campaign for similar packages.
- Unconditional German win: Greece default, with above consequences; a demonstration that budgetary discipline will be hard-met (a problem for countries like Italy and France).
- The methods used for this fight, beyond the usual meetings of ministers, is striking. Newspapers, blogs, everything. The term ‘Sources say…’ has been used so much, it’s incredible. The amount of disinformation is also incredible – as if both Germany and Greece have full-time PR wonks writing increasingly provocative statements against each other. This morning’s move in the S&P is a good example when both sides get to the rumour-mill:
- Where does that leave us? The markets are still hitting all-time highs, so clearly everyone expects a last-minute deal. Given the EU’s history, that’s probably a safe bet. In the meantime, folks like me sit chewing fingernails – my trading system really believes in a fortuitous outcome, so I’m left hoping and praying.
In sum: I figured Greece did some sweet game theory-inspired strategising, in hopes of getting an extension under more favourable terms. Germany has been absolutely, 100% defiant. Though the markets are betting on a swift resolution, my stomach is more uncertain. In the end, the Syriza guys can at least give themselves credit for using all available tools to make the best of a bad hand.