An independent professional's take on the latest news and trends in global financial markets

Looking beyond Greece

We don’t know whether the Eurozone agreement on Greece will hold – let alone for how long. My guess is not for long. In any case, for investors this long-awaited deal looks like a classic case of buy on the story, sell on the news. Financial markets have run up so strongly in anticipation of such an outcome that equities now look massively overbought, implying that the short-term reaction is more likely to be negative than positive. Longer term it is still impoosible to know for certain how this great drama reaches its endgame.

My view remains, as it has done for some time, that the best outcome now, as Bill Emmott was saying in The Times yesterday, is for a managed default (and probable exit) by Greece at some point in the course of this year, as it becomes apparent that the country cannot meet the demands which have now been placed on it. I suspect that this is the outcome which the Germans have been after for quite a while now, without of course being able to say so in so many words. It is also in the best interests of the Greeks themselves over time.

Whether it is the most likely outcome is another matter. Ditto for the consequences. Is the Eurozone is capable of organising a managed default of this kind? God knows they have had long enough to prepare for such an eventuality. It is easy to underestimate the political complexity of driving through any kind of multilateral agreement, given the political pressures bearing down on all heads of government in Europe. That said, it is hard to generate much confience from the drawn out fiasco of the last two years, which has exposed multiple shortcomings in the governance of the EU. The markets seem as normal to have swung from one extreme mood to another.

If however the threat of a Greek collapse can be convincingly managed without it spreading contagion, it will remove a big cloud that hangs not only over Europe, but over the rest of the world as well. News flow, as always, will be crucial to the markets’ next move. It seems most likely that we will get the normal summer relapse before finishing strongly towards the end of the year, as so often happens. That at least remains my working hypothesis In that sense the EU agreement, however botched and short-lived, is an important way station towards a more settled world.

Written by Jonathan Davis

February 21, 2012 at 9:45 AM