Thursday, January 29, 2015

No Return To Yawning Yet, But Greek Markets Have Bounced

Yeah, the crisis may be over.  Just like that, although probably not fully.  Anyway, the general hysteria of yesterday seems to be way overblown, even if the markets return to declining.  As it is, the Athens stock market rose today, after a sharp fall yesterday.  While the 3-year and 10-year bond yields are higher than yesterday, they shot way up in the middle of the day, but then turned around and fell, more or less mirroring the stock market.  The 3-year peaked at over 19%, but then fell to about 17.5%, about a 1/2 % above yesterday's close.  A similar but less dramatic move happend for the 10-year, ending well below the 3-year at 11.13%.

So, what is up?  Well, I would say that new Finance Minister Varoufakis and PM Tsirpas are following a good game theory strategy.  They have thrown down a maximalist hand publicly upfront, entrenching a lot of outcomes they would like to achieve and dumping all the "bad news" on the markets at one time.  There should not be any further nasty negative shocks coming from the Greek leaders themselves.  It is all out there now: cancelled privatizations, no more public workers laid off (and some rehired), pension increases, minimum wage increases, and so on, not to mention the assertion of their pro-Russian position.  Let me forecast that assuming there are serious negotiations and not just a train heading off the rails, that some of this may get scaled back as a result of them in exchange for a debt haircut (effective, if not official). But that would leave them with much of what they said they wanted, even if it looks like they may have "lost."

It should also be noted that the Greeks may have some support in the negotations from some important players.  In particular, President Hollande of France has made public statements at least somewhat sympathetic to the idea of reducing the Greek debt burden.  This has not received much publicity in the noise coming from German hardliners, but this is not all a one-sided affair.

Regarding the more detailed specifics of the market dynamics, it should be kept in mind that the main immediate threat, indeed really the only immediate threat, has been that of a full-bore bank run in Greece.  There has apparently been quite a lot of running, maybe as much as 1/5 of deposits.  That is a lot, and it accelerated yesterday, and bank stocks took the largest hit of any in the Greek market, some down as much as 40%.  However, there is every reason to believe that the ECB will help them out.  An ELF was established by the ECB to support the Greek banks a week ago Wednesday.  These are reviewed every two weeks, but one is in place, and offhand, given the commitment by the ECB to making the euro work, I see no reason why that will be shut down any time soon.  And I suspect realization of this may well have played at least some role in the markets bouncing today.

Furthermore, although apparently tax revenues are below expectations, Greece has been running a pretty healthy 5% primary surplus.  They really do not need to borrow from anybody (exept for maybe their banks from the ECB) any time soon.  About 80% of their sovereign debt is held by the ECB already, with most of that not up for serious renewal until July.  This looks like a big chicken game between Greece and the troka/Germans, with the latter threatening they do not need Greece in the euro, although they seriously want to keep them in, and Greece making major policy change and demands on the debt restructuing side, while saying they want to stay in the euro, even as many of their supporters say "Go, go, go to Grexit!"  So, there will be tough negotiations, but from where I sit I do  not see anything at all insurmountable about them.

It will probably take a few months of cliff hanging and carrying on, with the markets very likely to do some major see-sawing between now and then, but at some point a muddling through deal may be cut, and the markets can go back to their earlier yawning.

Barkley Rosser

Update on 1/30:  Athens stock market rose 8.6% today, and bond yields have fallen noticeably, with the 3 year down to 15.6 and the 10 year down to 9.6, nearly 2%  for both of them.  That this crisis has stopped being a crisis and turned into a merely unpleasant situation looks increasingly to be the case, although the news media does not seem to have picked up on this yet.


john c. halasz said...

The ECB doesn't hold 80% of Greek debt, technically speaking. Here's a break down from a quick google search: said...


You are right and I was wrong about the percent of Greek debt owned by the ECB. However, 75% of it is owned by the international bailout fund group, which is a group of European nations. They can easily extend the length of the debt and lower the interest rates on it, assuming that the Greeks offer some sort of fig leaf of reform. said...

It also looks like Greece may not be opposing Russian sanctions either. Apparently they were protesting not being consulted before the new sanctions were announced as being supported "unamimously." Not clear what their position will be, but it may be that they have decided they have enough on their plate with the debt negotiations and will not throw major monkey wrenches into EU foreign policy as well. said...

I must also note that I looked at the market outcome too early in the day this Friday. It had been up, but then both the stock market and the bond market responded badly to the blown up negotiation.

So, back to at least a bad situation, if not a full-blown crash crisis.