From Whispers to Murmurs

The rumor mill churned Monday (stocks did too, though US stocks ended the day nicely positive—volatility cuts both ways) on the possibility of a Greek default.

In our view, true disorderly default remains unlikely given the EFSF money already approved, not to mention the time, effort and money already spent to prevent it. Greece may technically default on some or all of its outstanding debt, but our guess is the process would be very well-organized and closely managed to minimize knock-on effects, with the goal of maintaining the euro. Perhaps it’s the orderly, planned debt restructuring, where voluntary private sector participation has already been negotiated, or something similar.

Despite the lack of materially new news, Monday brought a flurry of Greece-related headlines:

Greek PM Vows to Meet Austerity Targets

The question at hand is Greece’s ability to meet austerity goals—and its track record makes questioning valid at this point. As a result, Greek officials have shown renewed urgency in pushing through new austerity, like potential government employee layoffs, salary cuts for government officials and special property taxes. Their stated goal is to reap a quick enough result to avoid more tough questions from the EU/IMF/ECB.

Troika Readies Greece’s Next Tranche

In response to Greece’s new measures, senior IMF officials are stating they support the disbursement of the next tranche of bailout funds, scheduled to be released by mid-October. So for now, it looks like Greece should get needed funds.

“Germans Will Have to Pay”

Greek debt holders across Europe will almost assuredly take losses in a potential Greek debt restructuring, but that doesn’t necessitate the worst-case scenario of a disorderly eurozone breakup. And the idea Greek debt holders could face haircuts is well known—removing an additional surprise factor.

Germany Wants Greece to Stay in the Euro

There is speculation Germany wants to oust Greece from the euro, but there’s no formal mechanism in the Maastricht or Lisbon Treaties establishing an exit procedure. Germany’s official position—seeking to retain Greece in the union—is likely self-serving (who can blame them) to counter the uncertainty a potential Greek exit could create.

Support Grows for New EU Treaty to Boost Fiscal Ties in Euro Zone

Tellingly, not only do several European officials want to save the euro, some seek to strengthen the union and seem willing to make the treaty changes necessary to do so. This further speaks to the massive political will to push past all the hurdles to solidify a bailout framework for the periphery.

Interestingly, much of Monday’s reporting portrays the euro as a plague, preventing member nations from taking steps they may otherwise take to get their fiscal houses in order. For example, without the euro, Greece could inflate its way out of debt issues—not a surefire recipe for success, as Brazil demonstrated in the early 1990s, but a tactic nonetheless. Similarly, the core nations could target different monetary goals than the periphery—a growing Germany may want different monetary policy than a shrinking Greece, as is the case now.

But the euro does have benefits—like facilitating cross-border trade—that aren’t immaterial. In the near term, the downside of a disorderly dissolution vastly outweighs the benefits of single nation currencies—and Germany, France and others know this. That’s precisely why the EFSF (and the plan to enhance it) exist. Work remains to be done—after, the Greek issue isn’t solely about debt, and a competitive economy can’t be created overnight. But eurozone leaders have repeatedly shown a willingness to support the common currency for over a year.

Ultimately, it seems many assume the outcome of the Greek debt debacle will determine the future course of all things euro. But a Greek default, if done in an orderly fashion, is manageable—and likely wouldn’t pose a gigantic, negative surprise for markets. The Greek drama, for all its back and forth, differs from 2008 in many ways, like better-capitalized banks. But additionally and importantly, that it’s playing out amid a full-on media blitz in slow motion is materially different than fair value accounting’s high-speed negative feedback loop rippling largely unnoticed through bank balance sheets. Ultimately, investors may not like watching drip after drip of Greek news hit the press, but it’s infinitely preferable to an unforeseen tidal wave. So even if Greece defaults, which is more in the hands of eurozone policymakers than anyone else, there’s no reason a default can’t continue playing out slowly and without much further widespread disruption.