There isn’t an alternative to Greek default
GREECE is in a dire state. While people protest in the streets, bond yields consistently point towards expectations of a default. Things are going to be bad, but if the key actors continue to deny the inevitable, the tragedy will play out even worse. As such, forex traders need to keep on their toes.
SEEING THE WOOD FOR THE TREES
The former Federal Reserve chief Alan Greenspan has gone on record as saying of Greece that the risks of default are “so high you almost have to say there’s no way out.” Rishi Patel of Fair FX concurs: “Interest rates demanded by investors are so high it makes it impossible for Greece to fund itself through the bond market.” He argues that the structural deficit remains unchallenged: “Greece has already burned its way through one bailout, if it is offered the same again it will do the same.” Former foreign secretary Jack Straw MP believes “the euro, in its current form, is going to collapse.”
Throughout Europe and across the political spectrum, people are losing faith in a Greek renaissance. On bailouts, Conservative MP John Redwood has noted: “We could easily lose substantial sums through this activity. The IMF has been lending to euro countries at a little over 5 per cent when the market says they should be paying twice that.” His second concern is one of timing: “The UK government is rightly fighting the battle of the bulge on its own borrowing habits. Having to borrow more to lend to ailing Euroland economies through the IMF is not helpful to the UK programme of debt and risk reduction in the national accounts.”
THE EUROPEAN DISEASE
Ian O’Sullivan of Spread Co compares the Greek debt crisis to the Asian financial crisis of 1997/8, which swept across the global economy: “This started in Thailand, a small country too, but when that collapsed investors fled from the surrounding vulnerable economies. In the fallout, most of South East Asia and Japan saw their currencies fall, stock markets tank and asset prices fall across the region.” He thinks this is “something that could well happen in Europe.”
Yet, the can can’t be kicked down the road forever. Bill Bonner in his latest Daily Reckoning thinks “the problem could be solved by letting a few banks and speculators go broke. It would teach the rest of them a lesson. Most likely, Europe could get back to work soon after.” But for better or worse, the authorities aren’t going to let banks go bust any time soon – a managed default would be the best politically feasible option. Michael Hewson of CMC Markets suggests rather than throwing good money after bad, Europe should opt for a controlled default, by recapitalising exposed banks. Even this might fail. Capital Economics notes: “There is still considerable uncertainty about the ripple effects throughout the global financial system.” Adding “a Greek default would crystallise and deepen the worries about the dire state of the public finances in many countries.”
NIMBLE TRADERS
O’Sullivan warns that traders will need “to stay nimble.” He argues in a Greek default “the fallout could be swift and brutal.” As such, he thinks “euro-dollar will swing wildly and will almost certainly be hit hard. Just how hard will depend on the results in the days and weeks that follow.” Patel believes many questions are going to be asked about the effect of the current uncertainty on the other periphery nations. He says: “In January we saw the euro at $1.29. Given the current turmoil in the Eurozone, that level may not be as far away as the charts display.”
THE TRAGEDY
Greek civilisation arguably peaked in Athens during the fifth century BC. Then the wealthy subsidised the entertainments of the people, including theatre. There are few wealthy enough in Athens today to pay for such diversions. Unlike modern entertainment in which blood and guts are strewn across screen and stage, the Ancient Greeks confined their violence to the imagination – the chorus at the front of the stage described the deaths. In this modern tragedy, even though the key actors are ignoring the chorus of the market – the sound of the death knell rings clear.