We’ve been hearing a lot about the US ‘fiscal cliff‘ recently.
Barack Obama and the Republicans (now there’s a name for a band) are squabbling over the best way to put America’s finances on a sounder footing. Their deadline is 1 January 2013.
But another cliff is looming: the Greek fiscal cliff.
And judging by the tone of angry debating in Europe, Greece could end up flying right over it…
Greece is Still Europe’s Most Obvious Problem
Nearly four years on from the revelation of the original budget fiddles, you might have thought that Greece’s financial situation would have been resolved by now. No such luck.
Europe is still debating what to do about it. The country even managed to inspire yet another fit of panic in the currency markets.
Greece has to repay about €5bn in government debt this Thursday. The way governments tend to do this is by issuing new bonds. So they just ‘roll over’ the debt.
Trouble is, that means you need to find a lender who’s willing to roll over the debt. And the question is: who would be mad enough to lend to Greece just now?
Olli Rehn, the EU’s top economic official (according to the FT), has referred to this as the ‘Greek fiscal cliff’. Nice to see that European officials have at least retained their sense of humour.
So what will happen?
Well, so far, the European Union (EU) and the International Monetary Fund (IMF) have been supplying Greece with bail-out money. But the next tranche of €31.3bn has been delayed for a while now. And it’s not coming any time before next week.
The problem is, the EU and the IMF can’t agree on the conditions underpinning this aid.
Jean-Claude Juncker, for the EU, told a press conference that Greece would have to reduce its national debt to 120% of GDP by 2022. That’s two years later than originally agreed. But Christine Lagarde – head of the IMF – butted in to disagree, saying that the 2020 deadline is still in force.
Those kinds of public spats are never great for market confidence. Now they’ll all meet up again on November 20th to try to reach a deal again. That won’t necessarily be easy to do.
If Greece is to have any hope of hitting the 2020 deadline, then realistically, that implies that the EU will have to write off some of the bailout money.
Unsurprisingly, the prospect of having to tell domestic voters that they’ve just paid a load of money to Greece that won’t be coming back, does not appeal to many politicians. Germany, Finland and Denmark have already said that writing off any of the loan is a no-no.
This Greek Tale Will Run and Run
So where does this leave Greece? Greek banks have been buying up Greek government debt. Won’t they come to the rescue again? Not everyone is convinced.
The reason Greek banks have been buying Greek debt is because the European Central Bank (ECB) accepts them as collateral for cheap loans. But the ECB is now stuffed to the gills with Greek debt and isn’t prepared to accept anymore. As the FT puts it, ‘without the ability to use treasury bills as collateral, Greek banks have little financial incentive to purchase them.’
Rehn says that this doesn’t matter. The Greek banks now have enough cash to buy the debt anyway. And a report in City AM (via German paper Die Welt) suggests that the ECB will allow Greek banks ‘to tap emergency loans from Greece’s national central bank’ to roll over the debt.
But you can see why this rescue plan – held together as it is with sticky-backed plastic and last-minute double-dealing – has left investors feeling rattled. The euro slid against the dollar.
And even if Greece gets over the immediate hurdle of repaying this batch of debt, the long-term problem is still there. Unlike most of the other troubled eurozone countries, Greece can’t really be said to have embraced austerity and accepted its fate. The Irish and the Portuguese aren’t too happy with the way things are. But they’ve made an effort.
That means Angela Merkel can pat them on the head and tell her electorate that Ireland and Portugal deserve credit. That makes it easier to be lenient when and if more loans are needed.
You can’t say the same for Greece. And if the country isn’t seen to be making enough effort on its part, eventually its lenders are going to get fed up. The fact that the IMF and the EU are already openly disagreeing doesn’t bode well for the chances of finding a solution.
Eurozone Panics Are Buying Opportunities
All this means for investors is that you can expect more of the same. There will be regular panics over the eurozone. And at some point, we may see Greece exiting – which we suspect would be a cue for massive money-printing by the ECB.
What should you make of these intermittent panics? See them as buying opportunities. The peripheral European markets remain among the cheapest in the world, even although they’ve bounced strongly since the lows this summer.
We like Italy – it has much stronger fundamentals than the other troubled nations – but if you’re feeling very brave, you might be tempted to dip a toe in the other peripheral nations too.
John Stepek
Contributing Editor, Money Morning
Publisher’s Note: This article originally appeared in MoneyWeek
From the Archives…
APRA Spins Another Yarn On Australian Banks
9-11-2012 – Kris Sayce
The Secret Return to the Gold Standard
8-11-2012 – William Patalon
Forget the US Election, This Stock Market Event is the One to Watch For
7-10-2012 – Murray Dawes
The Greeks Giving Economists Nightmares
6-10-2012 – Bill Bonner
Super Fund Results: Whoopdeedoo
5-10-2012 – Nick Hubble
