Greek Default: Why Now May Be Best Time to Do It
As sovereign debt defaults go, there may be no better time than now for Greece.
Global investors are clearly in risk-on mode, with the US stock market off to its best start in 15 years and equities in many emerging markets faring even better.
Friday’s job report helped assuage at least one of the primary fears regarding the U.S. economy, even though the housing market remains a shambles—an improving shambles, but still a long ways from healthy.
Last week in general gave life to the recovery theme, with 15 of 23 indicators beating expectations and causing some economists to raise their growth outlook for the full year.
So, with sentiment running so garishly positive, why not go ahead and get that pesky Greek default and all of the accompanying futile denial out of the way already?
“In the last six months, there's probably been no better time to let Greece strategically default than right now,” said Citigroup credit analyst Jason Shoup.
Shoup was quick to point out that a Greek debt default is not Citi’s “base case,” or most likely outcome, but one that needs to be taken seriously if the markets are ever to absorb the magnitude of Greece’s problems and come out intact on the other side.
One key reason is that the window could be small for the present enthusiasm to last.
Some economists consider the startling jobs growth—a 243,000 surge in payrolls and an unemployment rate drop to 8.3 percent—unsustainable and as much a product of statistical anomalies as a jump in hiring. Specifically, a revision that saw the workforce drop by 1.2 million and a consistent drop in the labor force participation served as troubling signs.
If the recent uptick in economic indicators is indeed transitory, policy makers may want to consider attacking the Greece situation now while the market can still bear it.
“Letting Greece default either after a (Private Sector Involvement) haircut or in lieu of may have been unthinkable just a few months ago, but it wouldn't surprise us if resistance to such an idea may be weakening in the halls of Brussels and Frankfurt,” Shoup said. “Certainly, buoyant markets seem to be emboldening policymakers to take more of a hard line even while Portuguese bonds oscillate.”
Indeed, there’s the Portugal problem.
It’s hardly a secret that Greece will be only the first of several dominos likely to fall in the Eurozone sovereign structure. Several of its neighbors face burgeoning obligations that they cannot meet, and Greece’s importance as much as anything is that it will serve as a signpost for how future crises will be handled.
An orderly Greek default in which panic is limited and bondholder haircuts are contained means future defaults may not capsize the markets either. But let the crisis spread and the fallout could be catastrophic.
Bob McKeee, chief economist at Independent Stratedy, a London-based research firm, told CNBC that Portugal will be next on the agenda. The nation is far more stable than Greece, which is why the eurozone needs to address its problem children first and then work on more manageable problems.
Concerns over Portuguese debt have come since the nation’s 10-year bond rates hit their highest level since the creation of the European Monetary Union. That came after a debt downgrade from Standard & Poor’s. In a supposedly solid country with a new government, investor confidence remains a problem.
“We believe this is a sign that, despite the tentative progress made by eurozone leaders on a ‘fiscal compact’ and increased liquidity support from the (European Central Bank), the eurozone remains in crisis,” London-based Capital Economics said in a research note.
News over the weekend that no agreement has been reached in Greece mildly spooked the markets in Monday trading.
The developments show that despite liquidity assurances through the ECB’s Long-Term Refinancing Operations, the market wants some closure on how the European crisis will be handled.
Making a decisive move at a time when global markets have stabilized and appear ready to handle shocks, and before other debt obligations in nations such as Italy come to the fore, likely will be just the right medicine.
“While a sovereign debt default in Greece or Portugal might not trigger the end of the euro,” Capital wrote in its note, “such an outcome in Italy could very well do just that.”
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