A Weekend At Bernie’s

Support for Greece Declared – Sort Of

By Pater Tenebrarum

The markets last week gave our vaunted policymakers on both sides of the pond something to chew over, and the G8 palaver this weekend was marked by the usual sotto voce declarations that the once again budding crisis would be stopped dead in its tracks by whatever interventions are required.

Considering the fact that the financial markets are nowadays seemingly mainly populated by traders suffering from a special form of attention deficit disorder (this includes the mindless computer trading programs of various types that are active in the markets),  we can imagine that these declarations may create a short term bounce in 'risk' – whether it lasts for mere hours or a few days remains to be seen.

We are not trying to be facetious, nor do we want to appear arrogant. Anyone active in the markets today or observing them closely must have noticed that if the markets could ever be counted on to 'discount' fundamental developments in advance it is a phenomenon that only exists in the dimming memory of the old hands these days.

Instead markets tend to be yanked around by 'news', sometimes only for hours at a time, sometimes for days and weeks. It seems the effect is the greatest the more unimportant and unreliable the news item concerned is, specifically certain data points such as the US jobs report, or vague promises of official support like those uttered over this weekend.

However, as press reports on the G8 pow-wow point out, there was an undercurrent of discord at the G8 meeting that could not be glossed over entirely; even as word was handed down that a new tack was going to be tried.

As Reuters informs us: „World leaders back Greece, vow to combat financial turmoil“. One wonders what that actually means. Will they kiss Greece better?

"World leaders backed keeping Greece in the euro zone on Saturday and vowed to take all steps necessary to combat financial turmoil while revitalizing a global economy increasingly threatened by Europe's debt crisis.

A summit of the G8 leading industrialized nations came down solidly in favor of a push to balance European austerity – an approach long driven by German Chancellor Angela Merkel – with a new dose of U.S.-style stimulus seen as vital to healing ailing euro-zone economies. But it was clear that divisions remained.

"We commit to take all necessary steps to strengthen and reinvigorate our economies and combat financial stresses, recognizing that the right measures are not the same for each of us," the leaders said in a joint statement issued at their meeting at the Camp David presidential retreat in Maryland.

The overarching message from the summit hosted by President Barack Obama reflected his own concerns that the euro-zone contagion, which threatens the future of Europe's 17-country single currency bloc, could hurt the fragile U.S. recovery and his re-election chances in November.

With Greece's political and economic upheaval high on the summit's agenda and stoking concerns over instability in Spain and Italy, Group of Eight leaders sought to calm the situation. In the first line of their final economic communique, they essentially endorsed calls to broaden Europe's focus beyond German-backed belt-tightening, calling it "our imperative" to promote growth.

Anxious to quell investor fears, the G8 said: "We reaffirm our interest in Greece remaining in the euro zone while respecting its commitments." But leaders offered no specific prescription for extracting Athens from its worsening crisis.

It was unusual for the often-bland G8 communique to single out a relatively small nation. But fears that a political stalemate in Greece would lead to its departure from Europe's monetary union at unknown costs to the financial system and global economic stability have spooked markets. Greek voters this month toppled a government that had agreed to painfully austere terms of an international bailout plan, and uncertainty hangs over the next election set for June 17.

Spain too has roiled markets by revealing huge bad loans in its banking system as it struggles to rein in its budget while facing recession. Merkel, increasingly isolated by a French-led push for a more growth-oriented approach, sought to play down the differences, saying: "Solid finances and growth belong inseparably together and should not be put into contrast."

Obama, who has pressed Europe for more growth-boosting measures like those he pursued at home, used his closing statement to remind euro-zone leaders that the stakes were high and there could be "enormous" costs if they failed. "Growth and jobs must be our top priority," he said, reaffirming that Europe has the capacity to meet the challenge.

Marc Chandler, currency strategist at Brown Brothers Harriman, said: "It is significant that a group as weighty as the G8 backs Greece and reinforces the idea that Europe needs a strong union. It strengthens its hand."

In another move to shore up shaky global growth, the G8 leaders said they would monitor oil markets closely and stand ready to seek an increase in supplies if needed. While crude oil prices have declined by 10 percent over the past month, the threat of tighter sanctions on Iran loom next month.  The G8 said the global economic recovery shows promising signs but "significant headwinds persist."

The mountain cabins at Camp David where a shirt-sleeved Obama hosted the G8 leaders contrasted with recent tense meetings in European capitals about a sovereign debt crisis that just keeps getting worse. The economic communique endorsed a recent political shift away from the budget-cutting austerity that has been championed by Merkel and British Prime Minister David Cameron as the route to prosperity.

Instead it recognized a need to combine budgetary discipline with a growth strategy. This strengthens the hand of newly elected socialist French President Francois Hollande before a crucial European Union dinner on Wednesday to discuss growth.

Cameron, after an early morning gym workout with Obama, said he detected a "growing sense of urgency that action needs to be taken" on the euro zone crisis. London relies heavily on international finance and banking instability would strike a fresh blow to an economy already in recession.

"Contingency plans need to be put in place and the strengthening of banks, governance, firewalls – all of those things need to take place very fast," he told reporters.

European leaders seemed keen to stress that they would stand firm in protecting their banks, after news of escalating bad loans raised the specter that rescuing Spain's banks would crash the euro zone's fourth largest economy.

Hollande suggested using European funds to inject capital into Spain's banks, which would mark a significant acceleration of EU rescue efforts. But there was no direct mention of Spain in the communique or any indication of action leaders would take to combat the financial stresses.

There already were signs of a softening in Germany's austerity stance as the meeting began.

Germany's largest industrial union, IG Metall, struck its biggest pay deal in 20 years early on Saturday. The 4.3 percent pay increase, more than double Germany's inflation rate, will boost worker buying power in the euro zone's richest nation and lift consumption. That is something the United States has urged as a means to bolster overall growth throughout the world's second largest economic region.

(emphasis added)

So let's summarize the bullet points: Greece will be 'backed', but no-one said how exactly. Presumably that is because they simply don't know.

Next, they want to 'promote growth'.  Well, who doesn't? Is a more bland, non-committal statement imaginable? The question that remains unanswered is:  How exactly? The 'measures are not the same for all of us'. This can only mean that they are not of one mind.

Mrs. Merkel is correct: growth and solid public finances are not mutually exclusive. However, if one wants to have growth, one better enact market-friendly reforms.

The 'French-led push' is going in exactly the opposite direction – Mr. Hollande has yet to utter a single market-friendly word. He wants to increase both deficit spending and taxes – which represents what we would term a 'double blow to the economy'.

So how exactly does this alleged combination of growth strategies and budgetary discipline 'strengthen his hand', or indeed dovetail even remotely with what the man has so far said?