Veritas – High Noon in Athens

Markets and politicians will never agree on some things – quelle surprise, and c’est la vie.

‘Markets overreact, forcing us to make unpopular decisions,” complain the politicians.

Markets would reply to Europe’s politicians: “You only make your unpopular decisions when we force you to – and even then, only at the last possible moment.”

That was often the case in 2010, and it is definitely the case today.

The so-called troika of bail-out lenders (International Monetary Fund, European Central Bank, European Union) have given Greece’s government under caretaker prime minister Lucas Papademos until today around noon to agree to demands for the €130bn rescue cash.

The leaders of Greece’s three coalition parties met at length yesterday, but failed to agree on all the preconditions.

But agreement is vital for Athens to meet €14.5bn bond payments due on 20 March.

They did agree on public spending reductions for this year equal to 1.5% of GDP, Papademos’s office said, but division clearly remained.

The head of the New Democracy party was reported as saying the troika was “asking us for greater recession, which the country can’t take. I will fight to avoid that.”

Indecision and late decisions make markets understandably nervous – remember arguments in Washington last year over the US debt ceiling?

This morning the Stoxx Europe 600 Index retreated about 1%, UK blue chips dropped, and the Dax and Cac 40 fell mildly. Banks exposed to Greece fell, too, with Societe Generale and Credit Agricole each losing more than 3%. March futures contracts on the Standard & Poor’s 500 also fell, but only by 0.6%.

The amazing thing is that this year, and last year, markets did not fall further.

They had, on average, a good January.

Surely the prospect of an entire European nation defaulting is worth more than an 8.2% fall (2011) in developed markets? Or a mild 0.8% decline from the S&P 500, or even 20% from Germany or 18% in France? Greece, losing 58%, was perhaps a better reflection of the gravity of the situation.

The point, according to Dean Curnutt, chief executive of volatility trading consultants Macro Risk Advisors, is that markets have been able to “shrug off bad news, with the feeling that no matter how big the problems are, Europe will ‘muddle along'”.

Not any more. The problems have a deadline, and markets could suddenly stop their own ‘muddling through’ – later today, if Greece’s politicians do not agree demands, or certainly by 20 March, when private lenders knock on Athens’ door.

It is what Josef Ackermann, head of Deutsche Bank, might call a “make or break” moment.


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