WHAT to read into the
following?
At an event for CFOs and finance directors in London this week, I asked the
audience whether Greece would end up leaving the euro zone. Every single hand
went up.
Asked whether more countries than Greece would leave, roughly two-thirds of
the audience agreed they would.
Coming a week after an agreement on a second international bail-out for
Greece, such certainty that the country would have to exit the euro was
striking. It may be that an audience in London, albeit a cosmopolitan one, is
prone to misjudge the willingness of the euro-zone creditors to keep lending
money to Greece even if the country's programme goes off-track again. But I
still think their judgment is right, for three reasons.
First, the demands being made of Greece will be almost impossible to meet:
they will eventually need more money or some kind of forbearance. Wolfgang
Schuble, Germany's finance minister, and Jean-Claude Juncker, Luxembourgs prime
minister, have both suggested in recent days that a third bail-out may well be
needed.
Second, there is a finite amount of times that creditor nations can justify
bail-outs to their taxpayers,
and the poisonous manner in which the latest
package was agreed suggests this point may already have been reached. There is a
good chance that approving extra money is becoming politically impossible. The
Greeks themselves may well give up on the whole process, too.
To be clear, a Greek default is not the worry. It is already happening, after
all: a 70%-plus fall in the net present value of private-sector bonds counts as
a pretty severe pasting for investors. The worry is the unpredictable impact of
a euro-zone exit, not just for Greece but for the rest of the euro zone. The
Economist has argued for a Greek default for a year, but always on the
presumption that default need not mean exit. But it is ever harder to envisage a
situation in which official creditors take a loss on their Greek bond holdings,
which is needed to put Greek debt on a sustainable footing, but also agree to
keep funding the country until it starts running a primary surplus. Default and
exit are becoming inseparable.
Which brings us to the third reason why exit is likely. The prospect of
euro-zone departures (even multiple ones) doesnt scare people as much as it
should. The overall mood of the delegates at the conference was relatively
sanguine about the effects of an exit. Contingency plans were in place at their
firms to deal with it; this wouldnt be another 2008.
Yet 2008 is what the current
situation ominously resembles. Sticking plasters have been applied (for Greek
bail-outs, read the rescues of Bear
Stearns, Fannie Mae and
Freddie Mac)
but more rescues are needed. Politicians are reaching the point where they
believe that injecting more public money into failing entities is untenable. And
there is an assumption that people have had enough time to prepare for the
consequences of a shock that it would be absorbable. That strongly echoes the
mood when policymakers let Lehman fail.
Sometimes its good to be afraid.
