You knew this would end in tears.
Friday’s report in German paper Der Spiegel that Greece was considering leaving the eurozone — a prospect later denied by Greek and European officials — will be given the ol’ investigatory treatment.
Capital.gr reports:
Greek prosecutor Eleni Raikou opened an urgent initial probe on Monday into a Der Spiegel report suggesting that Greece might leave the euro zone.
The report will be investigated if it had disseminated “false news”, intending to panic Greek citizens and undermine confidence on the single currency.
The report appeared last week in the online edition of the German news publication and aggravated concern on financial markets that Greece cannot cope with its debt problem.
The Greek prosecutor has requested the help of German authorities to question those responsible for the site and for the article, according to a Dow Jones Newswires source.
Hellenic whispers have become de rigueur for European investors over the past year, and indeed, the Greek finance ministry has already asked for an investigation into a Citigroup email that allegedly suggested an Easter debt restructuring. Meanwhile, Greek and eurozone officials have become more talkative than a pack of Pi Beta Phi sisters, pouring further confusion and whiplash onto the market.
Jacques Cailloux, however, reckons the Spiegel article may have been a bit special. According to the RBS economist, it’s the first ever newspaper story to report purported discussions of an exit of a euro area member country. He calls it “the cherry on top of the rumour mill” but also argues that talk of such an exit, like all that restructuring banter, is still likely to garner plenty of attention from investors.
Here’s his reasoning:
In a context of asymmetry of information where the market does not know what the content of private discussions is it is easy to imagine why such a story can have a major impact on investors’ sentiment: in case of doubt assume the worst. Once the paste is out, it is difficult to put it back in the tube and this theme is not going to go away any time soon.
There are several reasons why this is the case:
First, populism across the euro area is on the rise. Nationalism and euro exit scenarios can easily feed into these populist views.
Second, the template of “quick and easy” return to prosperity used by those countries that went through a huge depreciation and an economic rebound thereafter might become more appealing as years of internal rebalancing hit hard on the social fabric of the countries undergoing such painful adjustments. It does not mean that these adjustment would not need to be conducted if a depreciation through the currency was available, it is just that the siren of competitive devaluation might still lure some.
Third, negotiations at the European level can be sometimes quite difficult as exemplified by the negotiation surrounding the Irish bail out (See for example Dan O’Brien’s excellent programme on the “Bail out boys go to Dublin”). When the negotiations get tough, countries might get forced to use their last cards.
Fourth, populations tend to accept economic pain for a while if they believe this leads to tangible results over a period of time that is not seen as too painful in one lifetime. Should the adjustment programmes fail to bring about tangible positive results over the coming years, sentiment against the euro will continue rising. In fact, as the chart below shows, this is a trend which seems to be already in place. As of the middle of last year, populations in countries that offered the help and those that received it felt less pro European. While one might argue that these statistics also show that the vast majority of the European population remains pro Europe, the trend is upward and the proportion is starting to be “politically” significant in the sense that once one in four in the population thinks Europe is a “bad” thing it becomes a topic of discussion.
Fifth, there is a rather unhealthy tacit agreement in the euro area that discussing such a topic is taboo. This in itself creates the unintended consequences that problems might emerge while not being addressed for a long period as policy makers and politicians either reject such issues or brush them aside as they are not seen as politically acceptable.
Sixth, if we have learned something about the last 30 years of financial crises it is certainly that it is very hard to predict how to move from a good equilibrium to a bad one and that these are typically multiple equilibria situations. In these situations, self-fulfilling prophecies can play a very important role in explaining the final outcome: in simple terms expectations of an event happening leads to the event actually happening. This is particularly relevant in the case of default when moving from a liquidity crisis to a solvency crisis. One can see the parallels in the case of exit scenarios.
Finally, we believe that the medium term policy response recently announced by the European authorities fails to address some of the real problems or in fact address the wrong problems (something we will write more about in the future). If we are right, then countries in difficulties might be working on the wrong objectives and will thus be disappointed not to see any results and economic crises involving excess private sector credit will come back as no credible safeguards are currently being contemplated. The next financial crises will be far more costly politically.
In all, while it is objectively almost inconceivable to generate an exit scenario that would make economic sense one can easily see such a theme gaining traction as all or some of the above materialise.
Baby, talk ain’t cheap.
Related links:
Is there a eurozone credit cycle? – Edward Hugh, CreditWritedowns
A secessionist recession for EU peripherals? - FT Alphaville