By the time the talk between Maria Bartiromo and Larry Fink got underway, nearly half an hour before the opening bell April 17th in New York, the financial news was dominated (not for the first time in recent months or years) by concerns about Greece, and specifically by worries about whether Greece was near default and/or Grexit.
There was a sense by Friday morning that the coming weekend would prove decisive in a crisis that has been in the making so long one forgets when it wasn’t. Greece was obliged to pay off an interest charge of €80 million to the ECB the following Monday. Just beyond that there was to be €200 million due to International Monetary Fund on May 1st and €760 million more, again to the IMF, on May 12th.
The present government of Greece came into power vowing not to sacrifice domestic needs to the demands of external creditors. For it, these payments will be especially demanding, because if they are made in full, the governing parties will open themselves to the charge that they have done exactly that.
What Was Clear When
On Thursday, Greece 10-Year hit 12.7%, up 62 basis points in the day.
Source: WSJ Market Data Group
Further, by the time Fink and Bartiromo sat down it was very clear that Europe’s investors were nervous about the consequences of a default. Europe’s most watched indexes fell between 1% and 2% at the open Friday. The yield on Germany’s 10-year bonds, the statistical victim of a flight to safety, looked ready to go into negative territory, getting as low as 0.057 before rebounding a bit.
Fink, chairman of BlackRock, thinks that the market is over-reacting. Indeed, his first words of the interview were, “I think the market has it wrong.”
That’s a weighty thing to say. Rational expectations theory tells us that when you think the market has it wrong … you are almost certainly the one in the wrong. Surely when the markets involved are deep and liquid, the odds that the market collectively is just missing the (publicly available) facts that are known to Larry Fink, or failing to draw the inferences that he has managed to draw, seems slight.
Still, let’s hear him out. Fink explained that Greece “is not a systemic problem” for Europe. He believes that Greece could and probably should leave the Eurozone – things will work better for the rest of the zone and “the whole financial structure of how Europe was created will crumble.”
What worries him, what would be in fact a “systemic” problem, would be if the troika backs off, and makes concessions to Greece that will allow Greece to stay in their club. If concessions are made to Greece, Spain will demand them, then Portugal, and so forth. If concessions are refused, and Greece as the “weakest link” leaves, then other members of the club will realize there is no benefit to demanding such concessions, or trying to cancel part of one’s debt by demanding war reparations from Germany.
If Greece leaves, this will be “very bad for Greek citizens,” but good for the rest of Europe. “I would be buying today” – assets associated with the rest of Europe – rather than selling, he said.
The Problem
The problem with Fink’s analysis, if I may, is that he almost equates Greek default with Greek exit here.
Yes, if Greece defaults in the upcoming days and leaves the club, that may have a cleansing effect for the rest of the club. But if Greece defaults and remains in the club, if it defaults and continues to use the euro: what then? The probable outcomes of that situation are all messy ones.
The underlying problem facing Europe today, as I have argued here before, is that the Eurozone looks like a more-or-less random collection of states, and a very odd collection to wear the garb of a single currency. Further, the problem with the present Greek government and all its recent precursors is that they have all accepted the “roach motel” premise. Having gotten into the euro, they can’t see their way out.
So … why the downward movement? What might the rest of the market have seen Friday that Fink was missing? Perhaps it saw the prospect of a Greece only half way out and stuck in the door frame.
The rational expectations may not always prevail in market pricing, but this seems a paradigmatic case for them. Markets are responding to troubles by devaluing assets most affected. That’s what they’re good at.