I don’t care what they tell us. Risk and opportunity are not two sides of the same coin. They are the same side of the same coin. Although volatility brings opportunity, it brings with it risk and I’m not sure whether traders or investors are, in the current environment of supreme uncertainty, too keen on filling their boots.
H2 began yesterday with the FTSE being pushed back by a fraction of one percent into negative territory for the year which, expressed in other terms, tells us that all the work of the first half has been for nought. The Dow is already back in the red but the S&P is still hanging on by the skin of its teeth, albeit by a mere 0.2%. One also has to go a long way to find any benchmark 10-year bonds which were trading better as at yesterday than they had been at the beginning of January.
Although I keep being reminded that Greece is not the only game in town, I’m afraid I have to disagree. Alexis Tsipras and Yanis Varoufakis might not quite be Laurel and Hardy even though, with their help, there is clearly a bit of the latter’s famous catch phrase “Well, here’s another nice mess you’ve gotten me into.” hanging over the European continent in general and its financial markets in particular.
Unfortunately, some of the questions being posed by the failure of the respective parties to find agreement by midnight CET last night, go far beyond the confines of the eurozone. The Athens “Spliterati” has brought into question many of the key precepts of our global financial edifice and now we find ourselves, as seems to be the “in” phrase “without a playbook”. Therefore, the correct answer to the question as to what happens next has to be “I haven’t got a clue”. Anything other than that is pure speculation which can, as we have seen, be overturned and reversed within days, if no hours.
Everything which was not supposed to happen has and everything which was supposed to has not. I just wonder whether game theorists will analyse event and adjust their model.
In his 2008 book “Game Theory, An Introduction” E.N.Barron writes of the nuclear option “…if both countries go nuclear, neither country has an advantage or can dictate terms on the other because war would result in mutual destruction, assuming that the weapons are actually used. Consequently, there is only a minor benefit to both countries going nuclear, represented by a pay-off on 1 to each. That is the same as if they remain conventional because they do not have to spend the money to develop the bomb, dispose of nuclear waste and so on”. Yesterday the Troika and Athens opted for the nuclear option.
It is not that the IMF, the ECB and the EU couldn’t carry the losses which a full and final default by Greece would bring with it. They can, as painful as it might be. What they can’t repair, however, will be the reputational damage which would be caused by Greece turning on its heel and walking away.
Stress on the ECB
To date the EFSF has raised close to €200 billion in the markets. Just under €50 billion of this has been lent to Greece. Guarantee commitments by the members amount to €726 billion so, from that perspective, the fund is safe. Where, on the other hand, the member states are going to take the money from in order to replenish the EFSF’s capital pool is a different matter entirely. The ECB would most probably also require partially recapitalising. Unless I’m mistaken, it so far still holds its Greek assets at par as it was exempted from the haircuts taken by private sector lenders in 2010. Just taking a mark-to-market, which it could surely no longer avoid if a formal default were to be declared, would cause fatal stress to its balance sheet.
The Athens Spliterati know all this and it has been based on such knowledge that they have played their game of chicken. The risk, in their thinking, was asymmetric and in their favour in that Greece is broke either way but that there was one option which would prevent the same fate befalling the lenders. What they missed is that Europe is above all a political construct and that, as in Greece, politics can sometimes high-jack economic and fiscal logic. If it were not so, we’d almost certainly never have ended up in the first place with a currency union without fiscal union. Greece simply forgot that this game of roulette was being played at a table with a double zero wheel.
Into the unknown
So there we are. Everything which should have happened didn’t and many things which were not supposed to have occurred have done. Now, if anybody believes that they can, at this juncture, tell us exactly where we go from here, they’re most probably either expecting to be unusually lucky or they’re plainly wrong. If they think that they can place better than even odds bets on an outcome with their clients’ or their shareholders’ money, they should be calmed down, put in a corner and swiftly be carted off by the men in white coats.
That said, rationally Greece is irrelevant to the global economy and once the impact of a formal default, should it occur, has sent its initial shock-waves through the markets and once they have regained composure, it might be wise to recall Bretton Woods and to rethink the way in which government- and quasi-government organisations freely and generously guarantee other countries’ borrowings with theirs and other’s tax-payers’ money.
Please don’t get me wrong. I am not suggesting an abolition of bilateral and multi-lateral financial support. I am simply suggesting that Greece should never have been allowed to build up €380 billion of external debt. €300 billion were lent in order to prevent it defaulting on €88 billion. Ermmm?
We are now all just passengers on the roller-coaster. The best we can to is to hold up our hands, scream like dervishes and wait for the ride to be over while hoping that we don’t bring up our lunch before the end of ride.
Please permit me to wish you and your team all the best for the second half of 2015. Calmer or wilder than the first half? Answers on a postcard.
