the Greek election

Yesterday Greece held a parliamentary election.  Its result was that the sitting government was replaced by a coalition whose main platform is renegotiation of the terms of that country’s bailout agreement with its EU creditors.

The Greek argument for further restructuring is that the country has suffered enough by not having grown for a half-decade, that it has made significant structural reforms and that, at 175% of GDP, its euro-denominated sovereign debt is impossible to repay no matter what Greece does.

The other side is, more or less, that Greece deliberately deceived lenders for years by issuing falsified national accounts, so it doesn’t deserve better treatment.  (There’s a fuller discussion in my posts  about Greece from 2010.)

When I saw the election news last night, the euro had declined by about a percent from Friday’s close and S&P 500 futures were down by about 12 points.  As I’m writing this, the euro is up by more than a percent against the USD, stocks indices across Europe are rising and the S&P is down by about half what the futures in Asia were showing.

How so?

I think the markets are coming around to the view–which I think is probably correct–that the EU knows deep down that the current austerity regime is unsustainable, particularly in the current no-growth situation for the union as a whole.  Greek may well be the trigger for a more general rethink of a restrictive fiscal policy that simply hasn’t worked.

If so, this would be another reason for a harder look at beaten up EU stocks.



a second Greek bailout payment agreed: implications

an agreement

Greece and the IMF/EU have finally agreed on conditions for the latest tranche of bailout money, €170 billion, to be paid to the troubled Mediterranean country.  Greece will now have the funds to redeem €130 billion of its bonds that mature in the next few weeks.

little stock market reaction

Stock market reaction in Europe has been muted–a 2% gain yesterday, a give-back of about half that amount today as I’m writing this.

what went on in the talks?

I find it hard to interpret with any confidence what has been going on in negotiations between Greece and the EU/IMF.  It’s possible that the brinksmanship displayed in the talks on the question of whether Greece would remain in the Eurozone was all a show, performed for home country voters by politicians eager to minimize the negative consequences of any accord for their future electability.  But that’s not what I think.  My take is that Greece–which hadn’t come close to fulfilling the conditions of its initial bailout payment–figured until recently that the EU was negotiating from a position of extreme weakness.  Until the EU made it clear it was willing to let Greece leave the Eurozone, Greece felt it could extract almost any concession, provided it didn’t do so all at once but rather moved the bar a little bit at a time.  Once the EU began to plan for a Greek exit, Athens was forced to become serious about striking a deal.


It seems to me that at the very least both sides have bought themselves some time.  I’d expect that the core EZ countries will continue to strengthen the capital structure of their domestic banks.  It’s understandable that potential buyers of the public assets Greece supposedly has on sale would be reluctant to bid until they were sure that they weren’t purchasing just before a significant currency devaluation.  So we’ll now have a chance to see how serious Greece is about these divestitures–and how desirable they actually are.

We’ll also have a chance to see whether the EU will retain its hard line that starving yourself through austerity is the best prescription for a return to robust health, or whether the ECB monetary policy will be a bit looser than it has let on to date. My guess is that it will.

Implications for stock market investors?  I think they’re less about a change in strategy than about confidence that the strategy is correct.  I view the EU as a low-growth area for an extended period of time.  And, although fears of a “Lehman moment” are off the table (not that markets ever really factored this possibility into stock prices), Europe will be subject to periodic worries about weaker EZ countries like Greece.

So the appropriate stance remains, I think, to be underweight the area and to concentrate on companies which are listed in the EU but which have the bulk of their operations located in the Americas or in the Pacific.

what’s that about Japan?

Actually, a much newer and more interesting macroeconomic development has been going on half a world away.  It’s quantitative easing in Japan.  More on this tomorrow.