Once again, Europe’s banking and finance chiefs are hunkered around the negotiating table. The Greek prime minister is optimistic a deal can be reached, the German finance minister dismissive. A debt payment is due; it is two minutes to midnight. The markets are hanging by a thread on the outcome.
Writing the news is getting easy – just cut and paste from the last time a Greek payment was due.
You could be forgiven for assuming nothing has changed, and a deal should be expected in the final hours of the latest crisis. This is at least an empirical approach.
But there are important distinctions to be drawn between the current impasse and previous ones. If Greek equities, Greek bonds and Greek GDP disappeared, it would certainly be a tragedy, but not of epic and globally destructive proportions. And it is more likely that Greece will default precisely because it is now bearable.
It is bearable because the IMF and the European Central Bank now own pretty much every bond on which the Greek government can default. There other holders, but not many of them. By now, each knows the risks.
It is bearable because, while Europe’s equity markets as a whole amount to EUR10 trillion, our broad-based equity index for the region, the S&P Greece BMI, comprises just 39 stocks with a combined free-float market capitalization of EUR $19.7 billion – about two one-thousandths of the former.
It is bearable because the GDP of Greece is now less than 1.5% of Europe’s – an amount otherwise sufficient to distinguish a great quarter of growth from a one of mild disappointment.
Of course, the risks of a Greek default have always been in the unknowable, the fall in confidence, the “contagion” — the secondary consequences. And it is in this respect that the world is different. Europe’s economy overall is growing again, and is more immune to shock. The majority of the region’s banks have completed stress tests in 2014 that, unlike the 2011 equivalents, explicitly tested robustness in the event of a default by Greece’s government. The financial markets have had ample time to prepare for downstream effects. Most importantly, the economies and markets viewed as most likely to suffer from contagion — Ireland, Italy, Portugal and, to a lesser extent, Spain – are looking much healthier. It is harder to see the next domino to fall.
In short, a Greek default looks more palatable today than at any point since this crisis began. And that is important precisely because political forces are at the heart of negotiations. If a default is more economically bearable, it is more politically feasible.
Europe does not want Greece to default, but it is a balance. The scales are now differently tipped. The Greek government does not wish to default either. But they were elected to renegotiate the terms of the current bailout agreements, remain in the euro currency block and to “end austerity”. If not all of those objectives can be achieved, they may well see the last objective as paramount. If a last minute deal is found, our headline can be put back into storage to be ready for the next crisis.
Thus characterized: a Greek default might indeed occur, but only if it doesn’t really matter.
This article was written by Tim Edwards, direct, index investment strategy, S&P Dow Jones Indices.
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