Toby Young, Journalist, Provocateur, self styled classical liberal and willful economic ignoramus proclaimed on Twitter this morning that:
Now if you’re in financial markets, you’re sick to the back teeth of hearing about Greece. Why? Because it is holding up everything. The greatest global bull market ever in financial assets is playing out – and Greece is interrupting the party in Europe. The US and China? Storming ahead:
But ask people in financial markets why Greece matters, and they’ll tell you breezily it doesn’t matter at all – that Greece is a tiny percentage of Europe’s GDP and that when some sort of solution or patch for it’s problems is found, we can all crack on and catch up with the rest of the world’s hugely inflated valuations. Which of course begs the question: Why are they not buying?
Always remember what financial assets are. Claims on cash flows – nothing more. Stocks give you a claim on future dividends, bonds to future coupons. I almost said ‘Entitle you to’ but that’d give a misleading sense of the certainty of the claim, because the claim is contingent. Contingent on the ability of the person or company or government on which the claim is made being willing and able to make it. We’re not used to thinking in this way because the modern capitalist economy is, simply expressed, a web of such obligations that mutually reinforce. You pay your debts as a company because you need a reputation to be able to repay in order to secure future working capital. As an individual, your credit score can determine the degree to which you participate in economic life. And yet, inevitably, obligations sometimes cannot or will not be met.
Whether it is right or wrong to meet obligations is outside the scope of this post, and completely outside the scope of financial market participants. The point is that once incurred- just or unjust – obligations are what underlie all financial assets. What we have in the case of Greece is a national government that cannot meet its obligations – principally due to huge policy error when global financial crisis hit the Eurozone in 2007/8 – and also due to the lack of effective governance. Those who say that a default on Greece’s government bonds won’t hurt the market miss the point – it’s not about a particular set of financial assets – it’s about whether governments can be forced to enforce financial obligations on their citizens. If they can, if the web of global institutions designed to promote exactly that is strong enough, then the implication for markets is clear. Regardless of stated political beliefs, justice or human welfare – financial claims must be upheld.
So can we expect this outcome? The signs to me seem clear enough. The Greek government has started to deny that capital controls will be necessary – and without wishing to be too cynical there is no reason for such denials unless they are being seriously mooted. Greek officials are on the tapes every day claiming that a deal is close – but not actually holding any new meetings with the Eurozone or IMF. This looks like PR management to avoid looking like they caused an imminent default. The IMF has announced it will allow the Greeks to differ a payment due on the 5th of June and make a consolidated payment at month end, again, no one wants to be left holding the smoking gun for what is coming. And what is coming? If the Greek government will not or cannot enforce its financial obligations on the Greek people – another arrangement for doing so will be needed. The ‘Institutions’ (EU, IMF, ECB) have plenty of levers to pull – and if they can’t act via the Greek government they will bypass it. Capital controls, a total loss of economic sovereignty.
If the web of international institutions is strong enough to achieve this and subjugate a sovereign nation in the service of meeting financial obligations, there is only one thing to do. Buy stocks – and be thankful that your ability to come up with some capital now means that you’re at the devil’s right hand, not in his path.