What we have here is a basic failure to communicate. European governments had thought the markets wanted Greece to be "rescued." The markets in fact wanted Greece to default and leave the eurozone.
That’s the traditional path out of a debt trap: give bondholders ugly haircuts, devalue the currency, and get back on track by selling to the world the fruits of one’s comparative advantage.
Unfortunately, one of the arts the Greeks have indisputably mastered, tax evasion, would be a tough sell abroad as a tax haven even if Greek banks were in better shape.
Which leaves the weather and the views, at least once the flames die down and the tear gas clears. And perhaps Greece and Germany would both be better off if, instead of financing purchases of Greek bonds, the Bundestag gave every German an Aegean holiday.
But if the Greeks would rather suffer German fiscal discipline than lose their strategic edge over the Turks, well, that’s hardly a sign of the apocalypse. The credit crisis along Europe’s fringe is bound to further slow subpar growth. The key will be how the European Central Bank responds and whether it will be willing to buy enough bonds to cage the credit bears. The American experience suggests this works, though having to borrow from the Fed’s playbook could prove to be one indignity too many for the ECB.
If the ECB dithers, speculators could continue to extrapolate from the troubles of a Mediterranean backwater like Greece to the fate of Spain’s global commercial empire. And every austerity package will merely depress anticipated growth and tax revenue.
Not that Europe is the markets’ only sore spot; there’s also China, which has the problems Greece would die for: too fast a growth pace and too much credit sloshing through the banking system. The central bank continued to drain the punch bowl with a sipping straw through yet another hike on the reserves banks must set aside against their lending. The Shanghai market hasn’t been the same since that process got under way last year.
Other Chinese growth indicators have also begun to flag, stoking speculation that efforts to cool the property market will soon reverse, or else that the economy might “crash,” to quote Dr. Gloom & Doom.
And while traders have come to expect nasty surprises from China and Greece, they got blindsided by Australia’s whopper. The Labor government unveiled plans for an additional 40% tax on mining profits starting in 2012, though the proposal depends on the outcome of this year’s parliamentary vote. Arguments for the tax based on foreign ownership of Australian mining assets didn’t endear Oz to the rest of the world.
At least the British pound is holding up, on hopes that Conservatives will lead a government after Thursday’s election. If not, a hung Parliament could be in the cards, as if the markets need another headache.
When the worm turns and stocks start going up, the Irish market could be poised to pop more than most. Dublin’s already done the hard work of reining in big deficits, and several of the food and materials suppliers listed there have been on an up swing before the recent seizure, according to David Fuller.
Meanwhile, growth remains brisk in India and Brazil, and Chris Gilchrist has been convinced that these emerging-market leaders still offer a handsome opportunity. India has 100 times the population of Greece, while Brazil is merely 18 times more populous.
Those who nevertheless opt to hunker down could do a lot worse than a Canadian trust yielding double digits from profits earned on a thoroughly depressed commodity. Roger Conrad has the scoop.
Whatever happens in the near term to Greece or China, the US economy has good momentum on its side. It’s looking like the big engine that could.
