FYI | Feb 16 2012
By Greg Peel
“If the Greek people or the Greek political elite do not apply all of these conditions, I think they exclude themselves from the Eurozone. The impact on other countries now will be less important than a year ago.”
So suggested Luxembourg foreign minister Luc Friedan on Tuesday. To financial trader Dennis Gartman, of The Gartman Letter fame, this statement represents a “crossing of the Rubicon”. Whereas last week the world was assuming Greece would receive its 2012 bail-out package from the EU-ECB-IMF troika, developments this week now indicate otherwise. The EU finance ministers had earlier been summoned to Brussels for a meeting last night in order to make what was expected would be a final assessment of Greece's agreed austerity measures ahead of an ultimate green light for the bail-out. That is until eurozone chairman Jean-Claude Junker of Luxembourg told the ministers not to bother. A conference call would be conducted instead.
“As soon as the meeting was downgraded to a conference call level,” suggests Gartman, “one knew that the death knell for Greek inclusion in the monetary union had begun”.
Gartman believes Greece's exit is now only a matter of “when” and “by whose hand”. In the case of “when”, he can't see Greece lasting as far as the March deadline for Greece's next big debt rollover – that which will trigger default if the troika fails to endorse the new bail-out. The question as to who will make the decision that leads to default is less clear, Gartman suggests. Either the EU will toss Greece out or Greece will decide to toss itself out.
The bottom line is that Greece not only has to agree to the required budget cuts but also effectively promise that the budget cut bill passed in parliament over the weekend will remain set in stone no matter what political party or coalition is in power. Greece will hold a general election in April and on current polling the incumbent coalition government will be ousted in a landslide. Leading the polling to become the new prime minister is Antonis Samaras, leader of the “conservative” factions. While Greece's centre-left political leaders all signed off on the budget cut bill, Samaras has proven unwilling.
For the other eurozone members, and particularly largest bail-out contributor Germany, this is not good enough. The refusal to sign throws doubt on whether a new government in Greece would honour the budget cut bill and ongoing requirements or not. Germany is not ready to throw more good money after bad, and Greece's track record to date in satisfying progressive budget cut commitments ahead of individual bail-out tranche releases has been poor.
Gartman suggests “it is becoming less and less politically incorrect for Europeans themselves to put forth this notion [of abandoning Greece]”. Luxembourg may only be tiny but the country played a prominent role in steering Europe towards a monetary union in the first place. Hence it is no small matter, Gartman believes, that Luxembourg should question an ongoing rescue of the recalcitrant member.
Fundamental to the issue of Greece' s default is that of the potential fall-out. It was over two years ago now that the then new government discovered severe irregularities in the budget books. The world has since had to endure two years of constant lines in the sand being drawn for Greece by the troika in order for the original bail-out fund tranches to be released. Each step along the way has been agonising, and at no point did it become clear Greece would not ultimately default. There are many outside and inside Europe who believe than even if Greece were to receive its 2012 funds they would simply delay the inevitable rather than prevent it.
Which means that for two years now, global financial markets have been readying themselves for a Greek default. Wagons have been circled. US exposure to Greek debt is said to be insignificant. US stock indices are up 20%. Yields on sovereign bonds issued by the likes of Spain and Italy have retreated from their highs. The risk of disorderly contagion from a Greek default is perceived to have lessened. As Friedan suggests above, the impact on other countries will be less important than a year ago.
Which is not to say there will be no impact, and global debt markets will likely suffer as a result. But which is the greater of the evils? A short, sharp reaction to a Greek default or more years of default speculation and risk aversion? We may be about to find out.
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