The deal hammered out on Monday night in Brussels on Greece’s debt offers a faint, cool breeze of hope, and not just because it opens the iron door a chink for Greece to escape from its prison of debt.
Despite the tensions, the general air of sanity surrounding the proceedings was a welcome change from some of the previous summits-to-end-all-summits. And sanity above all is what Europe needs.
The challenge now is to preserve that mood and help it strengthen. Above all, market participants should resist the temptation to be sucked into new panics or spirals of rhetoric that such-and-such a country’s debt dynamics are unsustainable or that austerity will lead inevitably to a black hole of depression.
The abyss into which Europe stared last year was above all one of loss of confidence. Investors ceased to trust the debt of even triple-A governments, while all kinds of economic actors lost faith in the prospects for European recovery.
This loss of hope, rather than the level of interest rates or government cuts, is the single biggest reason why Europe’s economic growth has gone back to flatlining.
When recessions happen, big business is usually in bad trouble. This time, Europe Plc is in great shape. The trouble is, companies are hoarding their cash, rather than taking on workers or buying new machines. And that is because they don’t know what the future will bring.
Since the autumn, the changes of government in Italy, Spain and Greece, the European Central Bank’s cash infusion to banks and progress on Greece’s restructuring have helped foster a calmer, more constructive mood.
Crucially, Italy and Spain’s 10 year yields have come down to the 5%-5.5% range, far below the levels that journalists and analysts gleefully trumpeted as “unsustainable” last year.
A measure of level-headedness has begun to creep back into financial affairs.
That was apparent at the talks in Brussels. Unlike some of the meetings last year, the negotiations led to a list of agreed results, which could be enumerated in bullet points, rather than to a grand statement short on detail.
Importantly, most sides in the talks gave ground – except perhaps for the implacable creditor countries like Germany and the Netherlands.
Rather than drawing lines in the sand, most negotiating parties rubbed them out and moved closer together. Bond investors accepted deeper haircuts, Greece yet more conditions and cuts, official creditors lower interest, the European Central Bank and national central banks the sacrifice of profits on their Greek bonds.
A clear roadmap
There are many hurdles still to go before that March 20 debt repayment is made, and even after that Greece will have elections and have to implement painful reforms. But the roadmap is a lot clearer now — and it is far from the most doom-filled path that many commentators had declared was inevitable.
The low-key reaction to the Brussels deal in financial markets today is also encouraging. Stockmarkets and the euro rose a little, then fell a little, then recovered a bit.
This is far better than the roaring rallies that followed some of 2011’s summits, only to burn themselves out in days, to be followed by slumps.
If progress continues to be made on Greece, there is a contingent among the financial chattering classes who will begin to start calling for markets and policymakers to “face up” to the debt burden of Portugal or Italy. Some serial Cassandras seem to do it just to relieve the tedium of daily life.
“Look at the GDP projections,” they will say. “With austerity the country cannot recover and its debt hole will get deeper. Something must be done, and the sooner the better.”
In an ideal world, perhaps a 50% debt haircut for Portugal would be a fine thing. It would certainly make things easier for the Portuguese.
But this is not an ideal world. Investors, politicians and corporate CEOs who make investment decisions are highly sentiment-driven. The official line, from German chancellor Angela Merkel, French president Nicolas Sarkozy and others, is that Greece was a one-off. It had to default; but other states will honour their debts.
That statement of intent is a basis — albeit fragile — on which economic players can rebuild a growth story for Europe.
Opening a new can of worms now, whether it’s labelled ‘Portugal’ or something else, risks plunging sentiment back to the self-fulfilling depressive mood of 2011.
Even if the bears are right and Portugal cannot make it through and start refinancing itself at the scheduled end of the bailout period it would be much better for this problem to be addressed in 18 months’ time — when Italy and Spain have had some time to get back on their feet.
Thinking about a Private Sector Involvement mark 2 for Portugal is fine, but let’s keep it theoretical. The last thing Europe needs now is to feel that contagion is real after all.