A Friday Fall

June 15, 2015

Greece was once again the dominant topic this week. Amidst the talk of markets being readier for the possibility of a Greek default, even exit from the Euro itself, markets are not behaving that way. As if synchronized, good news in the form of something resembling being closer to a deal sent global equity markets higher (Wednesday the latest case in point). Likewise, yesterday’s IMF withdrawal from negotiations due to a total impasse sent bourses lower, with today being exhibit A.

The country’s storyline is familiar. More than 5 years have passed since the first bailout, with a second two years later for good measure. In all, Greece owes a troika of creditors, the IMF (the U.S. being the largest shareholder), the ECB and the EU, a ton of Euros. Unfortunately, despite the single-currency’s decline vs. the Dollar in the past 12 months, the amount owed has not changed one iota. The total stands above 300 Billion, a whopping amount especially considering Greece has basically been in recession since the global financial crisis in 2008.

Near June’s midpoint, a fortnight away from the deadline for a resolution, where does Greece stand on a negotiated settlement? A compromise requires exactly that, both sides making concessions. How much can or will it concede? If no agreement is reached before June 30th, will a default of debt automatically mean a departure from the currency? All valid questions with plenty of unknowns. Rumors fly, sometimes daily, whether the final answer adds up to yes or no. A case can be made for both sides of the ledger, and just this week, we saw both sides of the same coin. The questions are easy to see and difficult to address. Crucial meetings are set for next Thursday and Friday. The question whether Greece and Europe will finally agree may be answered very soon.

The optimist will focus on European history, compromises that have been the hallmark on the continent since WW II. This side will analyze the euros at stake, small by comparison to debt on the books. The political nature of the discord. How acrimonious previous negotiations were before Greece succumbed to austerity measures. Finally, the intellectual argument that less than 2% of Europe’s economy should not hold 98% hostage. In essence, that it is more political than economic.

The pessimist will point to different things. A continuation of austerity is not the answer. Since 2008, the economy has contracted 25%. Pensions are untouchables, and the promises made in January by a new government need to be kept. Greece did manage a primary surplus last year, national bonds and bank stocks did rally last year. However, bonds and stocks have seen sharp declines this year, more so in the past month. Sometimes, what appears obvious may not be, and may be counterintuitive. That bond and stock prices have declined would not appear to strengthen the prime minister’s hand. Also, the Greek people who through the ballot box voted the current government into office, do not favor an exit from the euro. Polls have consistently made that point.

Beyond the loud noise of this drama, the same surveys indicate a willingness from a majority to compromise with creditors. The alternative solution, a return to the Drachma, and the potential of a freefalling currency with liabilities in euros may not be the optimum recipe. So, therein lies an opportunity to find common ground. Recognition of past debts, a duty to continue payments, coupled with an explicit agreement to restructure loans, may be a way out of a 4-cornered square.

In the U.S., the Dow Jones closed below the psychologically important 18,000 mark, slightly higher for the week. Tough not its worst levels, Friday took the shine off good economic data and a mid-week run-up. Still, the index clings to a very slight uptick YTD. The S&P lost its perch at 2100, while the Nasdaq closed at 5050. The data, beginning with Retail Sales and ending with consumer confidence improved, likely point to some recovery in Q2’s GDP. The longer view is whether it’s lifted the economy’s trajectory, and that may take more time to decide after winter’s rough patch. How much of Q2’s possible upside is making-up for Q1’s slowdown? Inflation and inflation expectations are stable.

Does that give the Fed a higher degree of confidence that longer-term consumer prices are moving toward its 2% target? At next week’s meeting, the Fed will address domestic growth, inflation prospects, along with the so-called natural rate of unemployment and, an estimate of the terminal funds rate beyond 2017. The Fed’s dots will make an appearance then.