Syriza capitulates: market implications

The markets have responded well to the Syriza capitulation and it is to the capitulation that they are responding. The capitulation has demonstrated that even the most belligerent of EZ governments does not actually wish to leave the EZ. It may huff and puff and posture but when push comes to shove it will back down and fall into line. It may not be possible to reach a deal on Sunday. It may be that Greece must take an alternative path. The key, from a market perspective, is that Greece co-operate with Brussels in determining this path. The institutions of the EZ have demonstrated that they are in control. Other left leaning governments (or right leaning for that matter) that want to challenge the sovereignty of the EZ over its members will think twice. This was never about democracy. It was always about sovereignty. The institutions of the EZ are in control and the markets like this.

The institutions of the EZ are the soulless minions of fiscal orthodoxy to which I refer in an earlier blog. The Euro zone crisis has shaped the future of the EZ. It is a response to the potential moral hazard intrinsic to currency areas. It is not a necessary response. Nor is it desirable. However, it is a response that markets like and the markets have been central to everything that has happened to shape the EZ. It is after all about access to sovereign bond markets. If Greece could persuade the private sector to lend to it at suitable interest rates it would not be in this mess. The real power rests in these bond markets. Bond markets like fiscal orthodoxy and what they want is what they get.

Equity markets are less concerned which fiscal regime dominates. They only need to know what it is and that it is stable and they can get back to business, which is to drift higher in price. The risk that the institutions were not in control of Greece, and the uncertainty that this generated, unsettled equity markets. It is summer and they unsettle easily in the summer. The capitulation of Syriza and the demonstration that the institutions are in control and will do nothing to upset sovereign bond markets, has restored calm. This is what the rally of today and yesterday is about. It also helps that the Chinese authorities may be getting to grips with their own market casino. The key to further gains next week is not in the specific deal reached but that whatever is agreed, Greece is compliant. 

You may conclude that this blog is facetious. It is not intended to be.

Syriza Capitulates: what has been achieved?

I have read the ‘Greek Prior Actions’ (GPA) proposal that the Syriza government has sent to Brussels in an attempt to get a further bailout agreement. It looks remarkably like the deal that was offered before the referendum and which the government advised people to reject in the referendum. It was advice that the electorate took. The referendum caused the closure of the banks and substantially disrupted the economy as well as degrading the assets of the banks and raising serious questions over their solvency. After all this the best that Greece can hope for is that this level of austerity be accepted in exchange for more debt. There is no demand for debt relief in the proposal. Brussels concedes debt relief is needed but in the same breath admits a classic haircut is unlikely nor indeed anything that degrades the current value of the debt. The total of Syriza’s achievement in power appears to have been negative as the economic and financial context has deteriorated markedly during the months of confrontation. Most important, the stock of trust for Greece and in particular for Syriza has been exhausted and is in deficit. It will cost the country to restore this trust. So much for the confrontational approach.

The GPA proposes a primary surplus of 1,2,3, 3.5% for the years 2015-2018. This will need to be reviewed in light of events. VAT reform will raise VAT revenue by 1% of GDP p.a. The standard rate will include restaurants and catering, and discounts for islands will be eliminated. Many red lines appear to have been rubbed out. A whole raft of structural fiscal measures designed to raise revenue and reduce subsidies are proposed. The proposals accept the need to reduce expenditure on pensions to achieve permanent savings of 1% of GDP. This will include a phased move to a statutory retirement age of 67. More holy cows put to the slaughter. Benefits in the public sector to be aligned with best practice in the EU. That will be a shock! The reforms sound right and are long over due. However, they involve further austerity, so much so that the EU is openly discussing plans for humanitarian aid for Greece. So what has been achieved?

Tsakalotos, the new FM, has at least grasped that trust needs to be rebuilt. To this effect he has promised to proceed with legislation for some reforms next week even before the bailout details have been agreed and finalised. Evidently, reports of Schaeuble telling him to ‘get on with it’ may have been true. Of course, Brussels may not accept the proposals in this form. They may demand more. Moreover, they may make any help on the debt conditional on progress in implementation. The next few years look grim. Where is the brave new world promised by Syriza? Worse still Brussels may conclude that this is all too little too late and that Greece will crumble both economically and socially if they try to implement this within the EZ from this starting point. They may still consider an orderly exit the best option. Sunday will reveal all.

The tricky problem is reopening the banks. Solvency can no longer be assumed and this will make it difficult for the ECB to continue ELA. This could be dealt with by ESM loans to recapitalize the banks or guarantees from the ESM on collateral, but not before a new package is agreed. It will also increase government debt to ‘save the banks’. You may wish to review some Syriza rhetoric on this subject. In any even, this will take a while so how do the banks open? The longer the banks stay closed the greater the damage to the Greek economy and the greater the degradation of bank assets. Mario Draghi has proved adept at finding solutions but even he admitted that this time it might be difficult. It is hard to see how, even with full capitulation, Greece will avoid a ‘temporary’ suspension form the EZ and a parallel currency framework. It is also hard to come back from such arrangements.

The net result of Syriza’s shenanigans has been to make matters much worse. Readers of my blog should not be surprised. The blog has traced the path of this car crash from Syriza’s election. They had a strong case but a weak hand and they played it badly. They went for confrontation when conciliation and understanding was required. They got carried away with their own rhetoric about being a vanguard for Europe’s downtrodden masses.They were heroic in their own minds and of their supporters. In practice they destroyed trust instead of building it and now have to pay a higher price to rebuild it. Tsipras et all proved to be a bunch of naïve amateurs and Greece is going to pay dearly for electing them. This is not to say the previous bunch were any better. It is perhaps most telling that Greece seems incapable of electing good leaders.