Monday, February 6, 2012

Now Best Time for Greek Default?

Jeff Cox of CNBC thinks now is the best time for a Greek default:

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 Strategy, 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."

The article is wrong in many respects. First of all, it is true that risk appetite has grown since Q3 2011, mainly because things are improving in the United States and will continue improving for the remainder of the year. Investors better get used to positive economic news coming out of the United States.

Second, and more importantly, even if risk appetite has grown, the global economy remains fragile and vulnerable to any shock. Letting Greece default would be the stupidest thing eurozone leaders can do at this point.

I say this because as I watch Greeks delay bailout talks as Merkel demands action and Merkozy setting up a firewall on Greek debt, I fear that both Greek and eurozone leaders simply do not understand what's at stake if Greece defaults. Time is running out for Greece which is why they have accepted demands by creditors to cut 15,000 jobs in the public sector this year.

But Germany and troika need a reality check too. It's time they recognize there are limits to austerity. Some of the measures they are demanding make no economic sense whatsoever. One professor on Greek television said it best: "They're threatening to light the house on fire so they're asking us to jump out of the window one by one".

Reducing the minimum wage is one measure that makes no sense. And Greek politicians have stop playing the charade with troika on trying to save private sector wages:

Within minutes of PASOK’s George Papandreou, New Democracy’s Antonis Samaras and Popular Orthodox Rally’s (LAOS) Giorgos Karatzaferis completing their make-or-break talks with Prime Minister Lucas Papademos on Sunday night, statements about battles being fought and rights being salvaged were launched into the Athens night.

Samaras and Karatzaferis led the charge of the white knights who claimed to have ridden to the rescue of the embattled Greek citizen. Their argument was that through “tough negotiations” they had saved, or were on the way to saving, the 13th and 14th monthly salaries in the private sector. Papandreou, whose credibility has already been shot to pieces, maintained a lower profile, while Papademos – to his credit – refrained altogether from engaging in this poppycock.

In the more sobering light of a wintry Athens morning and if reports are accurate, claims that red lines were drawn and wages ringfenced are worth no more than claims by card dealers on Adrianou that their games are not rigged.

While the leaders of Greece’s three coalition parties did not agree to the scrapping of 13th and 14th monthly salaries in the private sector, it seems they did accept a substantial reduction to the minimum wage. According to reports, the minimum wage – which currently stands at 751 euros per month (gross) – is to be slashed by 20 to 22 percent.

The first thing to note is that this will lead to the minimum wage dropping to between 585 and 600 euros per month before tax, meaning that someone in work could be earning as little as 470 euros per month after tax. In cities like Athens and Thessaloniki, unless there is a shift in the cost of living, it’s highly questionable whether these will even be subsistence wages.

Beyond that, the reduction would mean that the minimum wage will drop close to the level of the monthly unemployment benefit of 461 euros that Greeks receive for the first year they are out of work. This means unemployment pay will also have to be reduced; otherwise there will be no incentive for those out of work to take jobs on or just above minimum pay. Some reports have suggested it will fall to 369 euros.

Then, there’s the issue of pensions. A downward shift in salary levels means that social security contributions will also decline and there’s little doubt that pension payments will also have to be adjusted to sustainable levels.

However, perhaps we could excuse all this for the sake of snatching those 13th and 14th monthly salaries from the jaws of the troika. The fact they are paid in Easter, summer and Christmas does not make them holiday bonuses: these are about 15 percent of regular private sector salaries. So, surely safeguarding this chunk of Greeks’ wages and therefore preventing further damage to aggregate demand and exacerbating the recession is a true victory?

Here’s the problem, though. Private sector wages are regulated by the national collective contract agreed by labor unions and employers, or by sector-specific deals negotiated in the same way. Apart from the fact that the minimum wage provides the basis for the pay structure in these contracts (if the base drops by 20 percent, it stands to reason that everything else will drop by 20 percent as well), the deals remain in force even after they expire (metenergeia (continued effect) in Greek). So, if employers and unions fail to agree a new contract within six months of the previous one running out, the terms of the expired deal continue to apply.

What the party leaders are about to sign up to – again, if reports are correct – is the substantial reduction of the minimum wage and the abolition of the principle of metenergeia, or nachwirkung as its known in German law. In other words, if employers and unions manage to agree on new collective contracts, the baseline will be 20 percent lower than before, thereby affecting all the wage brackets above it. If the two sides don’t agree on new deals, employers will be free to negotiate individual deals with their employees. The basis for these agreements? The new, 20-percent-reduced, minimum wage.

While some of the political leaders will proclaim their role as saviors of Greeks’ hard-earned crusts by protecting the 13th and 14th salaries, it seems that all they have managed to achieve is swap a 15 percent reduction, which would have occurred if those monthly wages were lost, with a 20 percent one that will come with the slashing of the minimum wage and the terms under which collective contracts apply. Rather than two monthly salaries, Greek private sector workers are set to lose three.

The fact that some people are portraying this as a victory for their negotiating technique means that either they are woefully misinformed or, as is more likely, they are being intentionally duplicitous.

It’s too late for Greeks to do anything about this now. They are bound to pay for quite some time for the mistakes that they and the politicians they elected have made. The only thing they can do is make a mental record of the deception and recall that moment from the memory banks when they walk into voting booths at the next elections.

It was interesting, therefore, that Papandreou and Karatzaferis should both suggest that the term of Papademos’s administration, scheduled to end in April, might be extended even until 2013. After all, who out of the current crop of politicians would want to put themselves before the Greek public in the wake of such a cheap case of misdirection? Denying the public the chance to express its opinion on recent events would really complete the confidence trick.

Having vacationed in Greece numerous times, let me tell you, 400 euros or less a month is poverty, especially in Athens. Some of the austerity measures are stupid and counterproductive.

As Greece nears its latest bailout, markets are yawning, for now. I agree with Aaron below, markets should be very nervous about what's going to happen in Greece and the repercussions. We'll find out soon enough if the market has "completely discounted" a major Greek default. No matter what they announce in Athens, be prepared for a major risk ON or OFF reaction.

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