IFR SSA Special Report 2015
In boxing, the crowd often rallies around the underdog – especially if the fight is in the country that invented the sport. After tumbling to the canvas, Greece has staggered back to its feet and is now risking everything in order to win.
In the latest bruising encounter between Athens and Europe, the stakes could not be higher. This is certainly in keeping with tradition. It is said that Theseus invented a form of boxing in which two men sat face to face and beat each other until one was dead. But when it comes to this peripheral European economy, just as with ancient Greek boxing (pygmachia), lack of historical references mean the rules can only be inferred.
The election of the radical left-wing party Syriza has certainly electrified the audience as much as it has unnerved the punters, who fear it may embolden voters in Spain. And the gloves are most definitely off: the European Central Bank has toughened its stance towards Athens in recent weeks and global investors are spooked by the risk of contagion.
This has pushed short-term Greek bond and 10-year benchmark yields up and inverted its curve, while Spanish and Italian yields have been heading north, and stocks in the peripherals are taking a beating.
Nonetheless, many ringside commentators do not expect Greece to leave the euro and foresee a tie. Moreover, its pugnacious behaviour is at least bringing some clarity to the eurozone: the easing of the crisis has encouraged investors to start differentiating between peripherals they had once lumped all together as a bad bet.
The ECB’s de facto reaction to the Greek election – a larger-than-expected €1.1trn quantitative easing programme – has provided a distraction to all that grinding of teeth. However, QE may be a thumping good move, but it has raised other questions – not least what will happen to holders of long-dated euro bonds if eurozone inflation and growth rebound.
Another concern among policymakers is that Greece is punch drunk and simply unable to change. Other European sovereigns like Slovenia certainly show that it is possible to get back in the ring through reform after a bank-battering experience. Slovenia’s willingness to sell off state assets to balance the budget highlights how the real struggle is now about key pillars of the modernisation agenda: Greece’s new government wants to renationalise key assets.
The referee also wants to tweak the rules. The Basel Committee believes eurozone banks are not weighing risks successfully, and a rule change in late 2016 could saddle struggling players with yet more capital demands.
Latin American development bank Corporacion Andina de Fomento shows that a skilful boxer can dodge any concerns about capital-adjusted risk. In October Standard & Poor’s revised its outlook on the supra from stable to negative, but CAF’s super-liquidity has enabled it to brush off the upper-cut.
There is also concern that QE in Europe could tighten the supply of high-quality liquid assets as Basel III’s liquidity buffers drive increased bank demand for sovereign and agency debt.
Struggling to raise capital from traditional lenders, more reliable borrowers – such as the stolid Burgermeisters that run Germany’s cities – are turning to municipal bonds, and municipalities elsewhere in Europe are coming to terms with the idea of creating funding agencies.
Other less conventional instruments are also gaining in popularity: in 2014 the offshore renminbi market for SSAs sprang into life and Australia’s Kangaroo market experienced record growth.
If Greece’s pugnacity has done anything, it has reinforced an awareness among policymakers that old rules no longer apply and that in coming years they must address non-financial risks to growth.
Accordingly, there are signs that socially responsible investment pioneered by the SSAs is set to go heavyweight in 2015, after a benchmark US$500m Inter-American Development Bank issue in September aimed at poverty reduction in Latin America.
Indeed, at the end of the day the bout in Athens could signal something more profound: that fighting for a cause may be about to displace fighting for a prize.