We are only seven months into Donald Trump’s presidency. And I think we can call it a failure. I’ll have a lot more to say on that momentarily. But I want to flag this as not being a dealbreaker for the US or global economy because people put too much emphasis on the political economy in Washington. But Donald Trump is failing.
My argument has been that the US economy is not yet at stall speed and that recession is not on the horizon. However, I believe the US is slowing, and that, in conjunction with a strong dollar and the ongoing global growth slowdown, this presents a challenge for US-based corporates. With the Fed poised to raise rates, a recession in 2016 is not out of the question. That’s the macro story.
The micro story is that investors, starved for yield by zero rates, are reaching for yield in places like high yield and emerging markets. And these markets have more downside risk than present market conditions would suggest.
The Greek government has now been boxed in by the “no” referendum vote and is unable to make the kinds of concessions a “yes” vote would have allowed. Meanwhile, the Eurogroup’s thinking about the manageability of Grexit is coalescing around letting Greece go unless it makes major concessions. With only a few days left to come to an agreement before bank nationalization and IOUs are necessary, a deal looks less likely to me. Grexit has become the default scenario.
The easy part of gauging likely outcomes in the Greek sovereign debt crisis was predicting default within the eurozone. But now that this has happened, the situation becomes murkier and it is unclear what will happen next. Below I will put together a few thoughts on how to frame the dilemma. But, in the end, my answers are as uncertain as anyone else’s.
I know I keep saying that economics is not a morality play. But when it comes to Greece, I can find no other satisfactory explanation for what is going on. I’ve reminded everyone before about Irving Fisher’s famous observation: “The more the debtors pay, the more they owe”. In 2012, Michael Hudson developed this idea further. “Debts that can’t be paid, won’t be”, he said.
By Marc Chandler Through the venomous comments and erosion of trust, the broad framework of what couple prove to be a workable compromise over Greece’s financial crisis may be emerging. This is not to suggest that the eurozone finance ministers meeting will reach any important decision. Indeed, the Greek Prime […]
The situation in Greece is not about Greece at all. It is about enforcing an economic framework onto all Eurozone countries. And because the policy goal is primarily about enforcing this economic framework everywhere in the eurozone, there is less policy space available for compromise. It is this fact that makes the Greece government debt bailout negotiations so difficult.
Greece has reached the end of the line. Its debt repayment schedule is so large in early June that it will definitely run out of money without a deal. And judging from the latest negotiations, a deal that is mutually agreeable is not on the table as yet. Default is likely. The question now is whether Tsipras tries to sell this deal to his MPs and what the ECB does if he fails to do so and Greece defaults.
Europe is growing again and I see this growth phase lasting a while unless something in the Greek negotiation derails it. And while the Greek negotiations are tense I still believe Greece is an outlier that has indeed been isolated, making the threat of contagion limited.
After the meeting in Riga, it is more clear than ever that the gap between Greece and the Eurogroup finance ministers is wide. Default looks likely and so we have to start thinking about what this means for Greece and for Europe. My base case has always been default within the eurozone but eventual Grexit over the longer-term horizon. However, there are other scenarios in which Grexit happens sooner, and those will be instructive for other peripheral countries when the next eurozone recession hits, particularly Italy.
It seems that there will be no agreement between Greece and its Eurozone partners. Short of cash, the Greek government will have no choice but to suspend payment of its maturing debts. This column looks at what happens next. In brief, it will be very much up to the ECB to decide.
The question of whether markets are prepared for the default of such a large debtor is a good one to ask in thinking about tail risk as the situation at Petrobras encapsulates the intersection of emerging market US dollar corporate debt, sovereign contingent liabilities, the oil patch downturn and, monetary policy divergence quite well. The outcome is likely to be extremely negative for markets and economies.