Gavyn Davies, in his recent blog post, raises a good question on why financial markets have been complacent on the Greek-EU stand-off and is concerned that the market complacency could change to market panic if bad outcomes happen (a Greek exit). Fair enough. He does not go far enough to answer the question. He simply considers one possibility that the markets are complacent because there is no firm deadline to focus on. May be, that is one reason. But, the compression of risk premiums has been an issue with financial markets, thanks to central banks’ ultra-easy and ultra-accommodative monetary policies. They are the culprits.
Second, there is no question that we do not have markets in financial assets as the term, ‘market’ is conventionally understood. There are no large numbers of buyers and sellers. Different central banks and sovereign wealth funds perhaps transact among themselves. There is no market and there should be no surprise that there is no liquidity in various instruments. Check out the highly informative blog post in FT here.
Perhaps, the real reason for complacency in the market place is not so much the lack of a definite deadline to focus on but more familiar suspects – the central banks, their monetary policies and asset purchases and their seduction of the financial market (whatever remains of it) with these and worse, them becoming markets themselves!
Philip Stephens, on return from Berlin, wrote – if I understood it correctly – that the German Chancellor would compromise to keep Greece in the single currency, although he begins his column on the opposite side of the debate. His conclusion is something that I agree with: whichever way it ends – she (or the EU) might emerge the loser.
As of now – and I concede, I could be wrong here – I think that the Greek side has played the game well and hence, would emerge martyrs if kicked out and emerge winners if they get a deal that they can accept.
Age-old dictum reinforced: borrow big and lenders are vulnerable. China should remember that.
The one thing I do not agree with him is this:
An objective observer would have spotted a deal: radical reform of state institutions, the taming of the oligarchs and rolling back of the cartels and closed shops that impoverish the Greek people, and a sustained attack on corruption in return for the promise of debt writedowns.
The goodwill has been squandered. Syriza’s promises have come to nought. The cliques, cartels and oligarchs flourish as before.
It takes a few minutes to type these sentences and a few years, if not decades, to do reforms of this nature that involves political economy decisions. In the short-term, shutting down oligarchs might also mean shutting down some of the services they provide. Without putting alternatives in place, such reforms might cause more disruptions in the short-term. Greece lacks resources to plan for such contingencies.
In any case, this is the Greek ‘response to Philip Stephens:
From the first day in office I have been making a simple proposal to our partners, in the Eurogroup and elsewhere: Given that we have been elected to challenge the program that you believe in, and which you want us to abide by, the negotiations will be protracted. Let us negotiate in good faith. But, also, let us agree in the meantime, as quickly as possible, on a number of reforms that we all agree are absolutely necessary and which the previous governments refused to implement. Let us pass through our Parliament three or four, commonly agreed, bills that deal with tax evasion, that set up an fully independent tax authority, that strike a blow at corruption, that reform the income tax code, that regulate and tax television channels etc. etc. Let us implement immediately these reforms while the ‘larger’, ‘comprehensive’ negotiation continues.
The answer I received was unequivocal: “No! You must not pass anything through Parliament until and unless the complete review of the Greek Program is successfully completed. Any such legislation will be considered to be unilateral action and will jeopardise your relation with the institutions.” And so it was that the negotiations have dragged on and on, draining our energies while the economy stagnates, while important reforms are still awaiting legislation.
I had extracted them from a very good speech made by Yanis Varoufakis in Berlin on 8 June 2015. I wonder which FM in the world is capable of delivering such a speech. It is not a rhetorical question but one of genuine curiosity.