Athens in the Crucible

Markets took a bit of a breather the last week. Equities are priced at record highs, as the Dow hit 18000 and the S&P brushed it’s all time high. Yields decompressed in treasury markets slightly, with the ten year now yielding over 200 basis points when just a week ago the ten year yield compressed to 170 basis points. With equities and bond markets trading so exuberantly, something has to give. Bonds are priced for recession, while equities are priced for ambitious performance.

The biggest story of the last few months was the divergence in central banking policy, with the Fed and Bank of England poised for an increase in the discount rate in the summer or fall of 2015, while countries across the Eurozone, Japan, Sweden, Norway, Hungary, India, and China drop their discount rates. Some currency surprises, such as Switzerland permitting a swift appreciation of their currency by no longer suppressing it pegged to the Euro, have wrecked some speculators, while enabling others to ride on extended trading flows for simple medium-term profits. The Eurozone especially is having trouble fending off deflation, which has caused the ECB to encourage the purchase of Euro-denominated assets while the possibility of Greece exiting the Eurozone is causing a drag on markets. Chinese foreign direct investment (FDI) in Europe hit $18bn last year, double the 2013 level.

Talks to roll over the existing Greek bailout plan for another six months failed today due to an inability to compromise. The Eurozone is willing to extend the bailout package so long as Greece will continue to adhere to the austerity agreed to therein, including massive government layoffs, decreased government spending, on steep tax hikes. The leftist Syriza party that has been recently voted in promised the Greeks that they would take Greece out of such economic austerity, and is therefore unwilling to accept the bailout plan without significant modification to liberalize the terms of the bailout package. Greece’s finance minister Yanis Varoufakis is confident that the EU and Greece can come to reasonable terms in order to extend financing.

“We have one way, a reasonable way, a way which takes into account the vote of the Greek people: it’s what we call a technical extension, with flexibility and the possibility to change some elements of the previous program,” French Finance Minister Michel Sapin said after the meeting. “It’s the only reasonable way forward.” As it seems, Greece doesn’t possess much bargaining power, so it would be ideal if European finance leaders would affirm the Athenian democracy with a financing extension under more liberal spending conditions.