Friday, 3 February 2012

Greece, Geithner, GS

Time to worry about Greece?
Apparently (well, we have been wrong on this one before), the negotiations about the Greek  restructuring are inching towards a resolution and the private bond holders appear ready to accept a coupon of some 3.6% on the newly issued bonds. That corresponds to a haircut of 70%. You may call that a default or not, depending on your preferences.

But what worries me is the steady stream of reports out of Greece that the public sector is falling apart and essentially unable to implement radical policy changes. This is amply chronicled, even by such staid institutions as the OECD back in November. It begins to look eerily like Argentina.

In a telltale sign, Steve Hanke has publicly stated that Greece will fall apart. Hanke was the intellectual force behind Argentina’s disastrous “currency board ”in the late 1990s that led to the country’s default in 2002. He still does not see any responsibility for the failure but blames the fiasco squarely on the implementation.

Anyway, he has seen up close what happened, and he believes he now sees the same happen in Greece. It is not often you will see me reference Telegraph, but in all of their euro-hostility, they have made a listing of what could happen to Greece if not something is done to stop the downward spiral. Not funny at all.

The US Secretary of the Treasury may well be sacrificed by Obama in order to obtain re-election. Geither is widely seen as an ambassador of Wall Street inside the US Administration (I tend to agree), and it is likely that Obama will try to tap into the public exasperation with the financial sector excesses. Geithner’s position may stand in the way of the re-election strategy.

In a statement to reporters Geithner made a comment that gives away a lot of the thinking inside the Administration. “We are working to discourage other nations from applying softer rules to their institutions in order to try to attract financial activity away from the U.S. market and U.S. institutions”, he said. One can only assume that governments elsewhere have the same attitudes, and that explains why international agreements are so hard to come by.

But what about the European politicians who want to introduce tougher rules on their banks?

It must be official by now
Goldman Sachs, one of the leading consensus makers in the English-speaking part of the financial sector, has finally given in to the positive mood. Jim O’Neill, chairman of GS Asset Management offered the following gem:  “just the cessation of bad news itself has sort of appeared (to be) a bit of a positive”. It must mean that GS agrees with me about the (feeble) economic recovery and its influence on the market. I am sure he will receive a huge bonus for this rigorous analysis. Predictably others followed in his wake.

Should we worry?
In recent days there have been some disturbing reports about the trends in Europe’s broad money supply. Overall it can be taken as an indicator of the amount of credit given - but not a precise one. In the last months of 2011, the EU-zone money supply fell by a few per cent (in Greece it actually collapsed). We need to see this trend reverse in the first quarter in order for the region’s recovery to continue.

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