As ever, under cover of darkness and with malicious intent – that is to say, at the weekend whilst the markets are closed – the European finance ministers are meeting yesterday and today to try to square the Greek circle. The aim is to «persuade» private and public holders of Greek IOUs not to demand payment of their bonds upon maturity, but rather to «voluntarily» accept an extension of the maturity date that is as uncertain as the Greek state’s creditworthiness.
The theory is unclear, but the practicalities are even less so. It will be difficult to agree on ways to incentivise banks holding Greek bonds to accept a rollover (or extension) of the Greek bonds they have piled up in their armoured mass graves. As a point of interest, I’ll tell you that less than a year ago, the «intelligence» and «analysis» departments of various Spanish banks were suggesting that we recommend the purchase of Greek bonds to our clients. The argument put forward was something along the lines of «…the yield is very attractive and one mustn’t forget that this is sovereign debt from an EU member state, and the other countries will never allow it to default…». Back then, we looked like the fools in the film, preferring the lower yields of US corporate debt or even French or German sovereign debt. The barrage was constant: faced with «identical» political risk (France, Italy, Spain, Portugal or Greece), who would resist the chance to earn a spread 2, 3 or 4 points higher on Greek bonds compared with German, French or even Spanish ones (Rodrigo Rato’s unfunny joke is another example of how politically correct discourse distorts economic reality). Well, fortunately, we and many others have resisted a temptation which, in our view, was not even a temptation at all. Because although politicians insist on treating all risk as equal, Mr Market recognises vast differences in creditworthiness, and prices them accordingly. And that pricing usually translates into the assumption of real risk, which in turn also usually translates into larger figures, both in terms of losses and gains. It is a quasi-universal law, although politicians are determined to manipulate it, and most bankers are determined to believe it and spread it.
This attempt at manipulation is going so far that between now and the next St John’s Day, politicians are going to try to pull the wool over the markets« eyes. Yes, yes, you’ve heard right. Something as dangerous and reckless as that. Because the theory goes that if Greek debt is rolled over and the quality of its coupons or yields deteriorates, the credit rating agencies will determine that a »credit event« has occurred – a default, a restructuring, or whatever we wish to call it. The consequence of this would be that the rest of the peripheral debt would be left holding the baby; their prices would fall even further and the interest rate differentials (risk spreads) would skyrocket, plunging their (our) respective economies into irreversible misery. From that point on, the break-up of the periphery would be inevitable and the centrifugal force unstoppable. Therefore, the situation in the Eurozone is once again surreal and Kafkaesque in a way few others are: Greece’s debt must be defaulted on, but »it must look like an accident«. In other words, without the creditors demanding payment, they must accept the seven-year rollover (in reality, to infinity and beyond – that is, until Greece regains its solvency and ability to pay…), and furthermore, interest rates must be lowered relative to the market; and most importantly: that all this takes place without the credit rating agencies raising a peep to say that this constitutes a credit event. In other words, a default disguised as a »voluntary contribution’ so that the official absence of a credit event acts as an effective firewall. The squaring of the circle in its quintessential Euro-financial form.
In the words of Luxembourg’s Prime Minister Jean-Claude Junker, «…If we were to take a step that would be rejected by the ECB, by the rating agencies and, consequently, by the financial markets, we risk setting the eurozone ablaze…..» But ‘e pur si muove’ – in other words, we’ll have to try and pull some plump rabbit or scrawny, sickly hare out of the hat, because the deadline is imminent and there’s no money to pay it off.
History tells us that rating agencies are easily corruptible. Let’s say they’re young ladies who smoke and address you informally… Mind you, they’re looking increasingly weathered and wrinkled, although their make-up and overpowering perfumes mean that most people still believe they can find love in them – that is to say, reliable risk ratings. It is therefore not out of the question that surrealism might reach such heights that a Greek debt default might not be officially classified as a credit event.
What makes me feel most dizzy is the arrogance with which politicians (in this case, European ones) believe themselves capable of manipulating Mr Market. They boast of recklessly tampering with the very fabric of the capitalist system, just as John Hammond, the elderly millionaire owner of Jurassic Park in Crichton’s novel, used to do. Merkel, Sarkozy and other second-rate politicians display a disregard and contempt for the laws of the market that sends shivers down the spine. They may well manage to fool Mr Market (and therefore all of us), but the risk that this historic attempt at manipulation will blow up in everyone’s faces is more than considerable. The fact is that anti-tsunami barriers, as we saw in Japan a few months ago, sometimes prove to be insignificant.
To conclude, one final point. If Mr Market were to be permanently manipulated, it would be at the expense of the money supply generated by the ECB. This would put us in the same inflationary position as the US. Of course, if we’re going to manipulate things, why not do the same with the €/$ exchange rate… Spread your arms wide and feel the air on your chest and face. Now shout: «I am the King of the World«. Although I’m not sure if I prefer this one: «’I am the King of the World» (Homer Simpson), at least our downfall would be funnier.
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