Fisher Investments Editorial Staff
Geopolitics, Developed Markets, Deficits, Media Hype/Myths

Tick Tock Goes the Clock

By, 02/09/2012

The Greek debt saga continued Wednesday as Prime Minister Lucas Papademos and his three coalition partners cloistered themselves in the PM’s residence to nail down a new budget by day’s end. If they agree by the deadline, say commentators, crisis is averted; otherwise, Greece defaults.

Serious stuff this may seem, but forgive us if we’re not anxiously awaiting a Vatican-style smoke signal announcing their agreement. Not to diminish the urgency of Greece’s situation, but to paraphrase David Bowie, we’ve lived this 10 times or more. Here’s the typical pattern: Greece and the IMF/EU/ECB troika agree on a bailout, and Greece announces austerity plans to meet the troika’s terms. When it’s time to pay out, the troika debates whether Greece has tightened enough. Greece claims it’ll default without aid, EU officials demand more progress, both sides bend a bit, kick some cans down the road, and Greece gets its money.

Of course, all involved say the stakes are higher this time (as they do every time). Greece must make a €14.5 billion bond repayment on March 20, and the government claims it’s out of cash. Assuming Greek leaders don’t find some extra euros between the sofa cushions (something they’re rather adept at), unless they get more external funding, they’ll miss the repayment—technically defaulting. The aid in question would be the first tranche of Bailout 2.0, agreed to in principle last October. But that agreement had conditions—namely, super-tough austerity and private-sector debt haircuts. Neither is finalized.

Greece doesn’t technically need the money till March 20, but the bonds maturing were earmarked for the private-sector restructuring. That process takes about five weeks of paperwork-pushing, so officials want all agreements done this week. Hence, everyone’s on tenterhooks, eyeing Papademos’ front door. In our view though, that anxiety’s a tad overwrought. Yes, it’s a thorny situation, but don’t discount the pragmatism of all involved. No one wants a disorderly Greek default. Officials have spent nearly three years making sure it doesn’t happen, and chances are they’ll see this through. For example, leaders could streamline the debt restructuring bureaucracy or start the process before Greece finalizes austerity plans. In fact, it seems that’s what’s happening—creditors meet Thursday to finalize logistics so they can move quickly once a deal’s reached.

Here’s another sign of officials’ overwhelming pragmatism: Thus far, the ECB has adamantly refused to write down its Greek debt holdings, most bought last year for cents on the euro. Wednesday, it flipped, agreeing to swap these securities for longer-dated EFSF bonds with a lower face value, potentially wiping €11 billion from Greece’s burden. Now, this doesn’t mean the ECB takes a loss—it appears the new debt’s value will at least equal what the bank paid. Still, conceding a haircut (even if it’s in name only) underscores the willingness to make tough decisions for the greater good—the political will to preserve the euro is alive and well.

As is progress. Private-sector creditors are reportedly near agreement on a 70% net haircut, and even austerity is inching forward. After a week-long impasse, Greece and the troika reached a deal Tuesday: Pending parliamentary approval, Greece will axe 15,000 public jobs, cut minimum wages by 22%, cut pensions by 15% and slash spending by €3 billion. This package is what Greek party leaders spent Wednesday discussing, and if they agree, it should pass Parliament this weekend. Granted, as we write, there’s no deal, but one seems likely—these are politicians, after all, and they’re facing a likely April election. They’ll posture a bit to say they fought for constituents’ interests, but none wants to be pinned with a Greek default.

If all seemingly falls in place, markets might cheer the fact that yet another widely held fear didn’t come to fruition. But it’s important to note this is no magic fix for Greece’s competitiveness issues and struggles. Passing these measures simply means Greece can get its money, meet upcoming obligations and kick the rest a bit further down the road. And when Greece needs more money, we could watch the same saga again, replete with handwringing and politicking.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.