Thursday, February 11, 2010

Ever notice how the stars around the Euro sculpture in front of the ECB make it look like a cartoon that has been hit in the head?

So the EU summit today seemed to successfully navigate today between the Scylla of the Greek Unions and the Charybdis of the Bond Vigilantes. They basically made a non-announcement whereby they pledged aid to Greece in the event that Greece needed aid which they declared that it did not currently need. Their view was that the reforms currently proposed, perhaps with some additions, would be more than enough to combat the deficit issues and they called on Greece to take firm action to rein in it’s spending. What precisely the aid might be was left out of the communiqué.

This is where it gets interesting. So the communiqué was issued during the meeting and once it came out the Euro dropped like a stone. European equities also dropped like a rock. Spain, considered to be next on the list from Greece dropped 3% at one point. The US markets were off as well though good news on the employment front and a major buyback announcement. Markets generally headed lower until the press conference. At the press conference Merkel and Sarkozy repeated the mantra of the communiqué. A variety of other officials talked about how this was meant to send a strong signal to the markets of the confidence of the EU in Greece. The Prime Minister of Spain was at pains to point out that the Greek crisis has nothing to do with Spain. As to specifics the communiqué was a study in ambiguity. It took nothing off the table and it put nothing on the table.

Only one person was off message. The Prime Minister of Poland, Donald Tusk, was asked what form aid to Greece might take. “Cash and Guarantees,” said Mr. Tusk and at that moment the Euro began to rally. Now this is interesting. Was Tusk off message or was that the message? If either Germany or France said that they would provide cash and guarantees to Greece then it’s pretty much a bailout and the unions would dig in their heels. Poland? Who knows. The EU can have Poland say something explicitly like that and yet remain ambiguous because Poland itself is in no way capable of rescuing Greece. The other EU members have plausible deniability but they raise the risks of betting too hard against Greece.

All very interesting but the story is not over. All eyes are on the Euro, indeed the S&P 500 traded with the Euro all day today. The Euro is a massively liquid 24 hour barometer of what the markets think of Greece. If they think Greece is going under the Euro drops, if they think Greece will make it the Euro rallies. After the press conference the Euro rallied back from its lows but still closed the day lower. The European markets were closed by the time the press conference was over so the Euro is the only tool the Bond Vigilantes have against Greece overnight. We’ll see what Greek credit spreads do tomorrow. If they tighten and the Euro rallies, get ready for a massive jump in equity markets. On the other hand the markets might try to test the mettle of the EU Ministers. If so then we’re in for some fireworks.

1 comment:

Anonymous said...

Does the situation in Greece remind you of something closer, but long ago?
The current situation is the essence of why cooperatives don't work well in the absence of consensus around a leader. But the Europeans have not been able to establish enough common interest, and the Greeks used the incredibly low rates they had after monetary unification to spend themselves silly. Do you remember Drachma rates in the early to mid '90's? Do you think they could run a real estate driven economy with those rates? If the EU was Federal and Greece just a province or city, they wouldn't risk default, because Federal oversight would kick them all out of office. As a sovereign state supported by one of the world's largest central banks, they get the best of both worlds: low interest rates and no fiscal responsibility. Count one for the Greeks. I think they'll be the winners in all this.