Cliff Taylor
So far on the financial markets QE is outgunning Greece. Despite fears of a clash between the new Greek government, the EU and ECB, financial markets remained relatively calm today, with the exception of Greece itself, where bank shares fell and government bond yields edged up.
Bond yields elsewhere in the periphery, including Ireland’s, continued to edge lower in response to the ECB quantitative easing plan, with no signs of wider “contagion” after the Greek vote.
However, the Syriza agenda does provide questions for the Irish Government. Ireland will want to position itself to benefit if Greece is given any breaks on its debt. But Government sources here are sceptical about Greece’s chances of getting major concessions and are keen not to do anything to upset investment sentiment towards Ireland.
So the message is, as it was at the height of the crisis, that “Ireland is not Greece”. In the wake of the QE move, Irish 10-year bond interest rates were trading at under 1.1 per cent today, offering savings on further debt raising, including a forthcoming issue to refinance much more expensive IMF debt. In contrast, Greek 10-year bond interest rates are close to 9 per cent and their shorter term rates are in double digits.
Minister for Finance Michael Noonan was keen to highlight this and to recommend that Greece negotiate with its lenders to restructure its obligations, rather than acting unilaterally. Ireland has already restructured its debt to some extent, and is due shortly to refinance a further €9 billion of loans to the IMF. Greece has had two major restructurings but its debt ratio is still more than 170 per cent.
Mr Noonan also highlighted the gulf between the Irish and Greek economies and their current growth performance. The Government will want as much clear water between Ireland and Greece as the situation develops, while also keeping open the option of some restructuring of our obligations to EU rescue funds, if this emerges as a compromise for Greece.
Other peripheral bond markets were also largely unaffected by the Greek result. The simple explanation might be that investors believe that any fallout from the Greek elections will not have wider economic consequences . However, the reality is more likely to be that they, no more than any of us, know how this is going to play out. So they will sit tight and watch for a while as the new government is formed and Europe reacts to what is being demanded.
The row could get messy yet. Syriza has promised to end austerity and renegotiate Greece’s debt burden. The initial soundings from Germany, the EU Commission and the ECB were that Greece must stick to its commitments, even if some negotiations on its debt burden were possible. This opens up scope for disagreement on both debt write-downs and the plans by Syriza to boost spending. The ECB is likely to take a particularly hard line on money owed to it by Greece and to reject out of hand Syriza’s plan for it to act as an effective zero cost underwriter of peripheral countries for a lengthy period.
So far, investors are betting that Syriza will not push its case to a point that puts Greece’s euro membership in doubt and spark a crisis. This could happen quickly if, for example, Greece was to default on repayments because of not reaching a deal with its official lenders, or if the ECB withdrew funding support from Greek banks. Senior EU officials have argued that Europe is now much more prepared for a Greek exit, if this were to happen, but no one will want to test this theory.
Irish officials believe a compromise on Greek debt will be difficult to broker, not only because of the reluctance of creditor countries, but also because it could undermine governments in Spain – where the populist Podemos party is standing on a similar platform to Syriza – and Portugal. Both countries are facing into elections this year. Concessions to Syriza could also have political implications here. But offering further concessions to all the debtor countries – or conceding to Syriza’s demands for a “debt conference” to examine a wider deal across Europe – would be politically very difficult for the creditor countries.
For the moment the Irish Government will keep a watching brief. With the economy growing strongly, it would face a tougher argument for relief on debt repayment terms than Greece, despite the fact that Greece’s repayments are lower as a percentage of GDP because of earlier deals. However, if Greece does get a deal, Ireland and Portugal will be looking at the options. If it turns into a big row between Greece and the EU, then nobody knows where it will end.
