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Wednesday, 18 October 2017

Can-kicking, Greek-style

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So there you have it, the creditor group has agreed to lend to Greece. 

Call it “releasing another tranche of pre-agreed bailout money” if you will, but it’s being lent €8.5bn so that it can repay €7.3bn in July to the people it has just borrowed the €8.5bn from. It’s been a while since this term was on everybody’s lips but once again not much more has been achieved by the great and the good, the high and the mighty, despite all the wonderful rhetoric, than once again to have kicked the proverbial can down the equally proverbial road.

Luxembourg’s finance minister, Pierre Gramegna, said: “It’s a very constructive decision that will help Greece, also on the international market, to gradually get more credibility.” Well, he would say that, wouldn’t he, especially given that the 2010 bail-out bill, of which this settlement is part, was supposed to be for €190bn. It’s now €318bn. As one very smart friend of mine observed “… wonderful stuff, this compound interest malarkey”. 

The IMF has given the renewed bailout a deeply qualified nod on the basis that for the debt relief it is so adamant needs to be instituted to create a basis for fiscal sustainability, debt relief needs to be on the table. That was another subject which was firmly kicked down the road with another one of the creditor group’s typically nebulous promises to review that subject some time in 2018. 

BEEN THERE…

All the talk about a new dawn for Greece, a final understanding by the creditor institutions of the Hellenic people’s needs and the desire to show solidarity with a troubled brother has, let’s face it, all been heard before. Greece owes around €315bn, which computes to something in the region of 182% of GDP. Just for the record, since 2008, nominal non-seasonally adjusted GDP has fallen from €242bn to the current €175bn. We all know the maths and we all know that the figures don’t add up. The sort of debt relief that would be needed for the country to ever get the fresh start they’re all crowing about is out of the question. The prospect of Mutti Merkel winning the Bundestag elections in October and the über-hawk Wolfgang Schäuble batting on as federal finance minister should have everybody biting their tongues. 

Although Greece’s Q1 GDP growth has been revised upwards to +0.4%, which would mean a break in the recession, these are rounding errors in the greater scheme for this benighted nation. In the depth of the first wave of the Greek crisis everybody was banging on about the lack of any particular part of the economy which could, in the event of a bailout, help to put the economy back on the map. It was agreed that it didn’t exist, that the little bit that was there was uncompetitive within the straitjacket of the euro and that the best thing that could happen is that it defaulted properly, exited from the euro and was given the chance to reposition itself in the greater global economy. Five years later none of this has changed. 

In anticipation, the Greek 10-year bond yield had fallen from 6.10% at the beginning of June to 5.80% before the announcement of the new package but then drifted back up to 5.875% in Thursday’s trading. It felt as though there might have been a leak or two about the postponed debt relief agreement. Other than converting most of the outstanding debt into zero coupon perps I can see no way out for Greece and even that does not help a people locked in a currency bloc in which they cannot compete.

 

DONE THAT… 

I believe it was after the initial agreement on the first bailout in 2012 that a Zurich-based banker blithely declared that the Greek subject was now done and dusted and he suggested I should desist from banging on about it. We were, so it seems, both right. So would I buy Greek 10 years at 5.875% today if I wouldn’t have bought them at 15.5% a mere two years ago? I suppose the reluctant answer would have to be “yes”. Would I buy it over a Triple C corporate bond? Even more so. Would I bet my house on it? I most certainly wouldn’t but a lot of people have made a lot of money by doing so. 

This weekend will see Theresa May, rather rudely called “a dead woman walking” by former chancellor of the Exchequer and now Evening Standard editor, George Osborne, work out how she is going to approach Brexit negotiations that are scheduled to start on Monday. The EU has an incredible ability to do just what it likes, just when it wants to, and to somehow get away with it. In her favour, on the other hand, is the EU’s ability to declare very publically that it’s doing one thing while doing something entirely different. There are no rules, set or unset, for a country to leave the bloc and both sides will have to make then up as they go along. 

 

BOUGHT THE T-SHIRT

Sterling is in a bit of what the Americans call a roach motel. It can most probably only go down on bad news but has only limited upside if things go well. I noted at the beginning of 2017 that people who did not need to hold sterling would be excused for choosing to steer clear. In the event it has done remarkably well and even after the election fiasco it is closer to the year’s highs than the year’s lows. Nevertheless, the asymmetric risk profile seems stronger. That said, the split vote at yesterday’s MPC meeting – five to three is a proper split – indicates that the top rate setters have no clearer view on where the current path is about to lead us. 

The resistance to a further tightening of monetary policy can’t last for long and quoting one scribbler friend of mine, Gilt investors should wake up and smell the cordite. 

Alas, it is that time of the week again and all that remains is for me to wish you and yours a happy and peaceful weekend. I am back in the UK after a few days of temperatures in the mid-to-high thirties in northern Italy. People were busily moaning about the heat until I pointed out that I had left this country on Monday with the thermometer struggling into the mid-teens. Air con or central heating? Take your pick; I know which one I’d rather have.

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