Still holding their breath in Athens
The diver sitting on the bottom has been given another tank of air but he has not been brought to the surface. The austerity vote in Athens — at 155 to 138 — was in fact a much clearer result than had been expected, but not because of PASOC members not voting “yes” but because of opposition MPs abstaining rather than voting “no”. Alas, in Churchill’s immortal words, this is not the end, it is not even the beginning of the end, but it might be the end of the beginning. What it is the end of the beginning of, however, is still pretty uncertain.
Nobody in their right mind truly believes that the Greek government – any Greek government – can either deliver the savings, collect the promised increased tax revenues or generate the forecast income from the sale of state assets along the predicted time-line.
It was not really surprising that the vote was carried — the survival instincts of the Greek political class are no less than those of its peer group in any other country — and it was in the interest of all of them to make sure that the proposal got passed. However, they must, before they tax Stavros SixPack any further, address “fakelaki”, the Greek national sport of petty corruption.
So, not only do they have to cut the number of civil servants, slashing the incomes, benefits and pension rights of those who do remain but they must then try to stop them from supplementing their shrinking incomes by what they believe to be theirs by right. There have been endless studies which have reported that if all Greeks paid all the taxes that they should do, then it could probably run a primary surplus. That is true. It is also true that if my grandmother were red and had four wheels, she’d be the Number 44 bus.
There was a hugely anticlimactic feeling in the markets after the vote with a strong relief rally across asset classes but the smallest relative gains were in some ways in Greek bonds which, although firmer, don’t scream “We’re fine!” from the roof-tops. The two-years are still yielding over 26% which is the markets’ way of expressing that they are not yet in the mood to believe everything that they are being told.
Initially there were some triumphalist noises coming out of Brussels but they were rapidly toned down and in a joint statement Herman van Rompuy and Jose Manuel Baroso stated in a matter-of-fact manner: “with today’s approval by the Greek Parliament of the revised economic programme, the country has taken an important step forward along the necessary path of fiscal consolidation and growth-enhancing structural reform…”.
In fact, time has been bought – the time which the Eurozone leadership thought it had bought in May last year for the banks to write down their Greek assets to recovery levels and to provide against the losses but which it didn’t have because Athens ran out of money faster than anyone other than maybe Athens itself had anticipated.
Greece has not been saved, the three-year default schedule established in May 2010 has simply been restored. Reluctantly I might have to agree that it might prove to be a price worth paying but I can do so because I live in the UK and I am not paying it. If I were a taxpayer in Schweinfurt, St. Avold or ’s-Hertogenbosch I might hold a very different view indeed.
Markets have shown immense maturity by proving that they can focus on a single issue for more than 36 seconds but the time has come to start to look at the world as a whole again. I was hunting around for something to lift the spirits but only tripped over German retail sales for May which were reported this morning. The forecast was for plus 0.5% MoM but it came in at a surprisingly weak –2.8% and knocking YoY growth back to 2.2% from a revised plus 3.7% for April. I would not be surprised if I heard that the sharpening of the Eurozone crisis had the German consumer on the defensive and therefore I’d expect that this weakness to be more of an aberration than a trend.
Finally, this is the last week of the quarter. We have seen some sharp rallies in equities but the quarter-end index adjustments – especially when there have been manifest shorts – will have exaggerated the upward moves. I was always taught never to take the price action in the last week of a quarter seriously as fund-related technicals (what used to be simply called “window dressing”) took over the controls. The fundamental issues surrounding Greece have made quarter-end much more difficult and value judgement seems to be a bit random. Overall, though, the quarter is set to close in the plus, as is the month. Who would ever have believed it?