The Athenian Haircut – It’s Official

Once again, those hacks and pundits predicting the demise of the Euro have worked themselves and their followers into a froth of anticipation, only for the Euro to – once again – survive, with the Greek debt crisis averted. As I’ve predicted many times recently, there has been rolling over of debt, plus some private sector investors have had to take a haircut.

But even the latter class of investor, as the Beeb’s Stephanie Flanders has noted, has come out ahead of the game: they are taking a hit of 21% of Net Present Value (NPV), while the market discounting of NPV is more like 40%. And on top of all that, the cost to Ireland and Portugal of servicing their bail-out packages has been made that much more manageable.

Is that the end of the problems for the Eurozone, then? Well, no it isn’t. The problem of Greece is more than likely to return, any efforts by that country’s Government notwithstanding. And the tendency of the market to probe any supposed weak links in the Eurozone – most recently Italy – will not go away.

Moreover, there is the question of whether or not Greece has defaulted, but then, the state of California, as I mentioned a while ago, had its bonds circulating at a price that returned well under 100 cents on the Dollar, and no call of default has come. The all-important C-word (as in Confidence) has clearly returned to the markets, and that is what matters, and will continue to matter. Forget ratings agency bluster.

But what this episode has proved is that the European Central Bank (ECB), together with major Eurozone players, are prepared to defend the Euro and Eurozone, and are likely to continue so to do. This reinforces that market confidence, though the minus point is that this array of players is still not able to mobilise rapidly enough: that will have to change.

In addition, the idea of fiscal convergence will also not go away: there is only so much that can be done through what is effectively a larger version of what the UK calls regional policy, especially given the range of nation states involved. The various Governments and their populations may not wear that one right now, but that is where the members of the Eurozone are inexorably heading.

Should we in the UK be bothered? Yes, it’s happening on our doorstep, we do most of our trade there, and if it kicks off in the Eurozone there is no way we can insulate ourselves.

So I’ll be checking back regularly to see how it’s going.