‘Drachmaggedon’ averted – for now
Jun 21, 2012
The latest eurozone-induced market bounce “barely saw out the hour”, says Jeremy Warner on Telegraph.co.uk. On Monday morning, markets were relieved that an anti-bail-out majority had failed to materialise in Greece’s election.
That would have implied a stand-off with the rest of the eurozone, a likely end to rescue funds, and the reintroduction of the drachma as Greece was forced to print its own currency to keep the country going. That in turn would probably have been accompanied by a bank run as people tried to take their euros out before they turned into devalued drachmas. Panic could well have spread to the rest of the European periphery as other populations feared defaults and euro exits in their countries.
Nothing is resolved
This so-called ‘Drachmageddon’ has been avoided as the electoral arithmetic facilitates a pro-bail-out coalition. But very little has really changed, as investors soon remembered. “Brace for continued uncertainty and brinkmanship,” says Richard Barley in The Wall Street Journal. For starters, the largest party in the coalition that emerged mid-week, the centre-right New Democracy (ND) group, is planning to renegotiate elements of the rescue package.
Two leftist parties form the rest of the coalition, so the government may struggle to produce a coherent line on what measures should be taken even before the discussions with the rest of Europe and the International Monetary Fund start. If no agreement is reached, there could well be yet more elections. In short, “Greeks have voted for guerrilla warfare over the terms of the bail-out package rather than outright confrontation”, says Warner.
A modified bail-out package is only likely to include changes to timings, rather than the substance, of Greece’s austerity programme, notes Tristan Cooper of Fidelity Worldwide Investment. So the economy will remain “stuck in a deep hole with no clear escape route”.
Output is almost 20% below 2008’s level and half of young people are unemployed. Money is leaving the country in a slow-motion bank run. “The ferocity of deficit cuts has become self-destructive,” says the FT. Austerity undermines growth and revenues, necessitating even more borrowing, and hence even more austerity. Given all this, Greece could still turn its back on austerity and trigger a chaotic break-up of the single currency.
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Why Greece is in such trouble
The credit boom masked a huge loss of competitiveness. Reckless borrowing, spurred by low interest rates resulting from euro entry, fuelled a sharp rise in state spending, wages and prices. Wages rose by 30% between 2002 and 2010; in Germany, they slid by 8%. When the bubble burst, Greece was left without recourse to the traditional ways an economy tempers a bust and regains competitiveness: cutting interest rates and letting the currency slide. It can now only regain competitiveness through sharp cuts in wages and prices via austerity.
That has led to the current mess, while exiting the euro also implies extreme turbulence. A way out would be for the northern states to agree to prop up the south to a far greater extent. But there is little sign of significant movement towards deeper political and fiscal integration any time soon. The likely upshot? A fudged deal and then “we’ll confront this all again” in six months or so, says Daniel Knowles on Telegraph.co.uk.
Spiking bond yields in Italy and Spain are a stark reminder that even sorting out Greece won’t end the euro crisis. Europe’s rescue funds can’t cover those two major economies, so if they default a systemic meltdown is on the cards. With “no sense that Europe has a plan for averting [this] doomsday scenario”, says Larry Elliott in The Guardian, panicky markets won’t be persuaded to look on the bright side for some time.
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