Greece really should not matter, at all, outside of the tragic plight of the Greeks themselves. You’ll see that message echoed particularly inside the US where the status quo takes a contradictory turn toward reasonableness in order to justify further what isn’t. This is all about asset prices and how they have been so skewed almost everywhere that when one part of that systemic imbibing threatens to pull back the curtain the rest works overdrive to convince that it doesn’t matter.
Just fourteen months ago, then-Prime Minister of Greece, Antonis Samaras, went on Greek television and confidently proclaimed, “Today, Greece took one more decisive step to exit the crisis. Confidence in our country was confirmed by the most objective judge – the markets.” Going further, then-Deputy Prime Minister Evangelos Venizelos objected to any other interpretation, “The bond issue proves the debt is sustainable, otherwise the markets wouldn’t have bought it.”
Obviously, those were political statements intended to send a political message in that the “objective” market was on the side of that current Greek political makeup and the “austerity” track into which they proclaimed to be amalgamated, inextricably within the euro currency. Under rational expectations theory, of course, the price with which the Greeks floated that bond was believed to be “correct” and thus efficient. The 4.95% yield at the auction, 20 times oversubscribed, certainly seemed to suggest that it was “market clearing” in at least that respect.
The problem with all of that view is apparent right now. The 5-year bond, after having a pretty good week last week with all the false deal rumors, is yielding this morning almost 23%. The losses embedded in that yield and its price were uniquely predictable, which is what is so damning about Greece as it relates to everything outside of the “small country on the Aegean.”
When the government of Greece returned to the bond market in April 2014 with such fanfare, that was not the bond “market” but rather some distant semblance of one. By and large, and we know this by the price today, financial agents were not buying what Samaras and Venizelos were selling, instead were transfixed by the idea that the ECB would never allow it to happen again – the bond “market” was buying the “full faith and credit” of the central bank. This is what is so dangerous about Greece unraveling as it is a direct test of that predominate sentiment that pervades all asset prices everywhere. Central banks’ greatest “tool” has been to seemingly and somehow combine what they offer as liquidity as indistinguishable from banishing all “tail risks.”
What those engulfed in the frenzy of Draghi’s promise are finding out is that Draghi has very limited resources and even more limited factors of constraint. Normally, the Germans and Bundesbank are given this role of villain thwarting great monetary minds working toward universal salvation, but that, too, is a distraction. The real constraint upon the ECB is simply that what they believe happens doesn’t.
It is always assumed, owing in large part to the 1960’s orthodox treatment of the 1930’s, that liquidity is the answer to all these problems; liquidity leads to portfolio effects and lending, which leads to the “wealth effect” and spending, which is how orthodoxy thinks an economy can only work. It is a one-sided view upon a multi-dimensional space, where credit and debt are the solutions to every problem from banking to economy to even the cure for male pattern baldness. If it isn’t working there is an economist ready to tell you about how borrowing and banking will fix it.
European credit markets bought that as the promise underpinning the massive gains in peripheral bonds – that without further financial irregularity bond prices could only rise. Why Greece has to be the catalyst to drive out such sentiment is proof of how rotten the core of “bond markets” have become, enthralled by liquidity as something more meaningful than it really is or ever will be. If that was the answer, the LTRO’s surely would have turned out the real recovery by now; instead Europe fell right away into re-recession. The fact that in 2015 the ECB is now engaging in QE is not a cause for further asset price celebration, but rather the proof that none of it has worked; and so maybe, just maybe, none of it ever will. Despite all evidence pointing in that direction, bond “markets” still won’t let go of the slimmest possibility that the ECB will somehow come through and that there is huge “money” to be made when they do. Just look at trading last week:
Greece has been front and center as a financial and economic issue since March 2010. The ECB has thrown everything orthodoxy could conceive, under the rules of rational expectations and its twin alchemy, monetary neutrality, and still, five years later, depression and default and political upheaval set the grand order. There have been SMP’s, ELA’s, EFSF’s, OMT’s, LTRO’s, T-LTRO’s, ABS plans, CBPP times three, etc., etc.; Greece is right back where it started, except having lost what is likely the most valuable of any and all these financial factors: time.
You could argue, as some already are, that the ECB may not have succeeded with Greece proper, having instead created a financial ring-fence around the rest of the periphery so that whatever does happen eventually, even inevitably, the damage will be minor and inconsequential. But if markets were “right” about April 2014, then market prices today are not so roundly confident in the ECB’s continental handiwork. Setting aside the lack of recovery in Europe, the bond “market” is behaving, yet again, as if the last three years never happened. The phrase that I have, to this point, reserved for the Fed exclusively is rightfully applied to the ECB; they don’t know what they are doing. They never have.
That is the drawback of liquidity, even monetary policy in isolation actually containing or pertaining to money. It is an extremely blunt and unwieldy instrument that is taken for something highly precise – the entire point of calling it quantitative easing was for that purpose of misdirection, as if there are easily deciphered, objective numbers that spit out just the right amount of just the right monetarism. All central banks seem little prepared for the current state, where only asset prices are so greatly affected and the real economy so thoroughly unimpressed. Those two contradictory states will have to converge at some point, and Greece is, as its greatest danger for “contagion”, already trying so.