I feel deceived, let down and made to look like a bit of an idiot. Greece was supposed to have been sorted. Not resolved – it’s several hundred billion euros from being resolved – but at least it looked as though it had been temporarily sorted. Didn’t we all think that Yanis Varoufakis’ need to play out game theory had been satisfied and that Alexis Tsipras’ partner’s threat to deny him his oats if he backed down in his stance on debt forgiveness would not stand in the way of a deal?
Was it not, as of yesterday morning, quite clear that the cost of holding out was still regarded as too high as not to easily offset by the cost giving in?
Then, when least expected by markets (which still prefer outcomes which can be summarised in the 76 strokes which constitutes a headline on a standard Bloomberg screen), we were told that the interested parties, formerly known as the Troika (I never had thought of Prince and of the Troika in the same sentence until now) , had rejected Athens’ proposals (the ones we hadn’t seen) and that then, in response, Tsipras had dismissed out of hand the creditors’ counter.
The markets’ response might have been swift but it was, in the context of recent price movements, unbelievably tame. Bunds rallied a bit, peripherals sold off a bit and key equity markets were marginally softer. No sign of panic; just a collective and notably frustrated sigh of “On dear, here we go again…”. It all so reminds me of Puccini’s Tosca who, every time you think she’s about to expire, gets up and sings another aria.
Through all of this, the euro firmed a little which has to bear some logic, seeing as that it had weakened when a settlement seemed to have been arrived at after the week-end. Most had been surprised by the sharp fall in the currency on Monday until it had been established that “Peace with Greece” would free up the Fed’s hands and that a September move was therefore more likely. That, in turn, obviously pushed the greenback higher. Hence, quite logically, a wobble in the discussions would have to see the euro trade firmer. It did, albeit also only by a bit.
On the Fed and the IMF
I attended a meeting at an investment management company yesterday in which I expressed the view that the Fed had to move in September, not necessarily for economic reasons but in order to establish clearly that it would not let itself be dictated to by the IMF with respect to when and by how much it can or cannot tighten, and that it would apply its monetary policy based on the needs of the US economy and not on that of the rest of the world. Its remit is all-American and if it decides to look out of the window at the rest of the world, that’s its decision, and not that of two French citizens down the road in Washington at 700 19th Street.
In her briefing after the FOMC meeting last week, Madame Yellen appears to have said – or that’s how I heard it – that one small increase in the Funds target, come when it will, should not be taken by markets as the first step in a fast tightening cycle.
In the past, when the first move had been made, markets could expect a step higher at one meeting after the other for some time to come. After the legendary first move in February 1994 – those of us who were there will never forget it – from 3% to 3¼%, the FOMC raised rates at five out of the next seven meetings so that by November of the same year rates were at 5½%. This will surely not be repeated, so the IMF has nothing to fear. The FOMC will in all probability quite happily, nevertheless, remind even Christine Lagarde and Olivier Blanchard of whom it works for, who pays it and who sets it remit.
I wrote on Tuesday morning (and with no inkling of the shenanigans awaiting us) that the Monday rally would continue and that Wednesday would be the day to sell again. If we put Wednesday’s relatively modest market movements down to a simple technical consolidation, then one could quite rationally, though not necessarily correctly, even argue that the shaky Greek headlines really had no effect at all.
Decent run
One way or the other, volumes remain derisory and the summer lull hasn’t even begun yet, although the first schools are beginning to break up for the summer holidays. Although there is some activity in the primary markets – Cap Gemini did a lovely three tranche deal for an aggregate of €2.75bn – I can well imagine a bit of a back-log building up and issuance remaining a decent run rate through most of July. HSBC, incidentally, followed hard on the heels of ABN-AMRO with a Tier 2 subordinated issue and that space now looks like a possible future flood area.
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On a completely separate and totally personal note, I last night attended a dinner to celebrate a character I have often written of and referred to under the pseudonym of “my tame central banker”. I can reveal, now that this personage has retired, that “he” is in fact a “she” and today she collects a CBE from Buckingham Palace for her efforts. I should like to congratulate her – a few of you know who she is – and thank her not only for what she has done for the public side of the UK’s financial system but also for her support of my humble self.
I am by trade an historian and not an economist. Over the best part of two decades, her rigorous intellectual discipline and endless patience with me have done much to rein in my kitchen economics and to put my thinking and my understanding on a more solid footing. I can count myself lucky to have had her as one of my low friends in high places and she is already sorely missed.
The City is a much poorer place without her.
