We here in Asia have been fairly immune to the developments in Europe of the past two weeks and equity markets have focused mainly on domestic issues - namely increases to monetary policy accommodation (Australia and China). However, the events currently unfolding in Europe will come to affect this region soon enough.
There are growing expectations that Greece is on the verge of leaving the Eurozone – this mood is increasing rapidly now that newly elected Prime Minister Alexis Tsipras has continued his pledge to roll back austerity, despite creditors in Europe warning against such moves.
In a meeting with the ECB finance ministers on Friday, not only was Prime Minister Tsipras rejected in his demand for funding extension (it equates to bridging loans) but he also saw the stakes raised when the troika imposed tougher funding requirements by demanding the collateral put up by Greece be credit worthy. There is also a growing concern Greece will run out of funds as early as 1 March if some sort of agreement isn’t reached. The run on Greek banks since the new government was elected is gigantic, as investors fear a Cyprus-styled banking freeze.
What’s more pressing is the overall mood towards Greece. Nations which Greece may have expected sympathy from can only be described as cool. The likes of Portugal, Spain and others are publicly speaking out against the new government’s demands to a point where Greece is becoming so isolated that newly-elected finance minister Yanis Varoufakis is going to find tomorrow’s emergency finance meeting in Brussels nothing short of prickly, as the 18-nation bloc line up to chastise its current policy position.
Commentators are queuing up to suggest Greece is headed to the exit under the current conditions. The most notable commentator is Alan Greenspan who believes Greece’s exit is a foregone conclusion. I think that’s strong, considering the amount political will put into the eurozone over the past two decades. However, it’s not hard to understand why the market and commentators alike see it as a high possibility when you read into the complexity of possible solutions to the debt problem.
Currently, creditors are unwilling to take a haircut on the outstanding debt (most of which is held by institutions, not private banks).The Germans are particularly resolute on this point. One possible ‘solution’ is for maturities to be extended by ten years and the rates on the debt lowered. This would see upwards of €8.4 billion of debt saved compared to GDP.
However, the length of the debt is already 2041. Moving it out to 2051 will impoverish the nation for almost two generations and even with a cut to interest rates, they would remain historically elevated. This solution also requires Greece to provide credit worthy securities – something it doesn’t have along with several other complex requirements. It is not hard to see why Greece is on the verge of being set adrift and if its new government continues with its new demands, it may well be the only option.
Ahead of the Australian open
Interestingly, the futures market here in Australia is pointing higher, even with the news from Europe overnight. We are currently calling the market higher by ten points to 5810. Yesterday, CBA and Telstra both contracted. Today is the last day to own CBA shares to qualify for the dividend, as it reports tomorrow while Telstra reports on Thursday.
The thirst for yield is so strong that, even at these very elevated multiples investors, continue to pile in. The squeeze here is building, however CBA’s shear weight alone can move the whole market. With minimal change to the front and middle-end of the bond curve, funds are unlikely to change direction in the interim.