Let’s see…a heavily-indebted country can’t pay its bills, engages in a long series of failed attempts to manage a partial, controlled default, sees most of its capital flee to safer venues, and then, in a final act of desperation, imposes capital controls.
But it quickly realizes that it’s too late. Capital controls, to the extent that they ever work, have to be imposed by surprise, while there’s still some capital to control. If you wait until everyone expects them, the banks empty out in anticipation and you’ve locked a barn sans horses.
That’s pretty much what Greece is looking at in the next couple of weeks. Though a bailout remains possible, the markets have decided that it’s no longer a sure thing and capital is streaming towards the exit:
Those discussions lasted anywhere between 45 minutes to an hour, with the breakdown a painful reminder of the fact that the International Monetary Fund bailed on its own talks with Greece last week. The can has now been kicked all the way to the last-stand June 25 European Union leaders summit in Brussels, where some say Prime Minister Alexis Tsipras has all his hopes riding.
But there’s also a meeting of Eurogroup finance ministers on Thursday, and many are looking anxiously for Athens to come up with new reform proposals ahead of that. June 30 remains the big line in the sand as Greece has a 1.6-billion-euro ($1.8 billion) payment to the IMF looming, after it bundled all its four June repayments into one.
The question is, what will markets do in the meantime? At least as far as Greek bonds and stocks are concerned, maybe just keep panicking. The yield on the 10-year Greek bond pushed above 12% in Europe’s morning, on track for its highest close since late April. It was up 90 basis points at 12.72%, according to electronic trading platform Tradeweb. The yield on 2-year bonds surged 3.9 percentage points to 28.66%.
Let this continue for just a few more days and Greece will be, financially as well as socially, a smoking ruin. It will also be a glimpse of the future for the rest of the developed world. The fact that the US, Great Britain and Japan can create their own currency allows them a bit of flexibility that Greece doesn’t have. But just a bit. As debt continues to rise faster than GDP, the gap between what’s owed and what can be repaid is becoming a chasm, with consequences that are both inevitable and inescapable.
Viewed this way the difference between Greece and the rest of us is cosmetic and very temporary. Where Greece negotiates with the IMF and ECB, the big debtor nations negotiate with the financial markets via QE and other kinds of debt monetization. The goal in both cases is to placate creditors without changing the behaviors that caused the problem. In both cases it has worked, for a time.
The fact that Greece is blowing up while the printing-press-endowed countries are not just means that the stock and bond markets are easier to fool than the ECB and IMF. But no one is permanently credulous. Everyone catches on eventually, and the soaring volatility in stocks and bonds around the world imply that Greece isn’t the only con artist about to be exposed. In bonds, for example:
The $1.2 trillion meltdown in just three months is an early sign that it will not be easy to wean the world off six years of zero rates — and central banks have used up their arsenal. The gyrations gripping the world’s fixed-income market are so great that it’s almost impossible to make sense of them on a historical basis. In Germany, for example, yields on 10-year securities have surged from almost nothing in late April to about 1 per cent last week — a move so swift that some strategists are likening it to a once-in-a-generation event.
“The German bund market is incalculably volatile,” said Scott Thiel, BlackRock’s deputy chief investment officer for fundamental fixed income in London. “It doesn’t make sense to measure it in traditional respects.”
Across Europe, investors are ripping up their old models to analyze the US$100 trillion global bond market that dictates how much consumers and companies pay to borrow. Volatility is soaring as central-bank policies diverge, whiffs of inflation emerge and new regulations cause big banks to back away from their traditional role facilitating buying and selling. Continue reading here.