This WSJ headline is missing a word: Again. The Eurocrisis has been moving in slow motion since we discovered that Greece was not forthright with its government finances. We are all sick to death of the seemingly endless repetition of the Eurocrisis news cycle, and I do not see the endgame coming anytime soon.
This article analyzes where the Eurocrisis is heading based on upcoming key events on the calendar. This is an excellent review of those events and what they could mean, but I believe that the article is too alarmist. Europe is not in as bad shape as some people want you to believe; in the short-term, that is. In the long-term, countries will either have to default on their debt or make drastic budget cuts to avoid the default; however, Europe currently finds itself in an equilibrium . While their economies are in recession and their budget situations are becoming more dire by the day, they have the money and some tricks up their sleeve to keep the train on the rails a bit longer.
I couldn’t tell you how long this situation can persist without an adverse event causing a market panic. No one can, but the current situation can persist indefinitely.
In the second paragraph, the writer implies that Spain is getting close to losing access to bond markets. Foreign demand for Spanish bonds has been close to zero for quite some time, but Spanish financial institutions still can keep these domestic bonds on the books at pretty much face value.This quirk of the capital rules assures steady demand for quite some time.
The ECB will give Spanish banks loans against the bonds without a haircut through its liquidity programs. The Spanish banks can (and will) continue buying Spanish bonds, pledging the bonds for cash and using the cash to buy more bonds. All the while, the banks collect the interest from the bonds, which is much higher than the dirt-cheap rate they pay the ECB. I am aware that this scheme will eventually lead to disaster, but not today. The Spanish situation will remain static indefinitely.
In the third paragraph, the article rightly points out that Greece needs more cash. So what? Greece always needs more cash. It has needed more cash since it left the Ottoman Empire in 1821, and the world hasn’t ended. The reason why Greece will not be allowed to default and start the much touted contagion effect is because it is cheap to keep Greece afloat. For €28bn in two easy payments of just €14bn a year, you can keep Greece from defaulting.
This paltry sum is a rounding error in the multitrillion dollar Eurocrisis. The ECB could easily get Greece this sum with the same backdoor bailout that it used in August to keep Greece from defaulting on a €3.2bn bond payment due to the ECB. No one wants to be blamed for a Greek default, so the Eurozone will keep it afloat indefinitely. A Grexit or Greek default will not be the cause of the meltdown.
Another important event highlighted by the article is the German Constitutional Court ruling on the ESM. If the court says, “Neine,” then the Eurozone loses its paymaster and all of the hope and prayer keeping markets buoyant will dissipate instantly causing a huge market meltdown in Europe.
This adverse consequence is exactly why the German court will not rule against Germany’s involvement in the ESM. The German court is a group of politicians, and what politicians do is avoid blame and take credit wherever possible. If the German court rules against the ESM creating a market panic, it will lose a great deal of credibility and gain a lot of blame. The Court will rule in favor of German involvement with a minor caveat or two that does not restrict the ability of the German taxpayers to be on the hook for unlimited liability.
On the same day the court decision is due, we have Dutch elections. The anti-Europe parties are drawing support of roughly one-third the Dutch electorate. This figure is significant, but it is no game-changer. Exiting the euro has many consequences. Even if the anti-Europe parties form a governing coalition, it will be years before they are able to make any drastic changes in the Dutch relationship within the EU and Eurozone.
Lastly, the article rightly mentions that the ECB head Draghi will continue to jawbone. For example, the ECB assures us that it is “designing” a bond-buying program. Folks, a bond-buying program is no 787. It does not take a team of people working for years to design; basically, you need one bureaucrat, a pot of coffee, a couple of croissants and a day. It can’t be a Friday, though. Nothing gets done on Friday. This stalling is just jawboning, and it has proven highly effective so far. There is no reason to believe that it will stop working.
The event that starts the Europanic will not be something of which we are aware. These types of risks can be ameliorated. What will happen is that there will be a big surprise, a.k.a. the black swan, that catches everyone off guard and ultimately starts the endgame.