Draghi behind finding a deal for Greece

Outlook:

The Greece problem should come to a head on Friday when the eurogroup meets.
Or not. Nobody can see the end-game, assuming there is one, although it now looks like Draghi is in opposition to the eurogroup. He says membership in the eurozone is “irrevocable” while many other European officials are willing to let Greece go. Greece funding itself on T-bills bought by the ECB is hardly a sustainable method. Varoufakis told the press on Friday after meeting with Draghi that Draghi is behind finding a deal.

The NYT reports that Greek FinMin Varoufakis met with restructuring lawyer Buchheit at Cleary Gottlieb on Friday. He’s the guy who designed and brokered the 2012 haircut, although then the creditors were private and this time they are nearly all public. Dijsselbloem has said “no haircut” this time but honestly, that looks like the only alternative to cutting pensions.

The FT’s Munchau writes “The economic case for a debt default is overwhelming. It is hard to see how Greece can ever service its debts as agreed. Even in the creditor countries few people are under illusions about Athens’ long-term debt-servicing capacity. Full servicing would require huge primary surpluses — that is, surpluses before payment of interest on debt. It would leave Greece trapped in a debt depression for a long time. The scheduled primary surplus for 2016 is 4.5 per cent, which is bordering on the insane. Athens absolutely needs to default.” But not leave the eurozone, which would ruin any chance of Greek recovery as well as the eurozone’s reputation.

European leaders seem to be at a loss on how to proceed. They cooked up a cruel and unworkable bailout that the Greek citizens have rejected. We may criticize the incendiary rhetoric of Greek leaders, but they are not wrong in their analysis of the situation, both morally and economically. It doesn’t help Greece’s case that Ireland just reported its deficit down to 4.1% of GDP at end-2014, from the EU target of 5.1% and 5.8% at end-2013. It was 13% only 4 years ago. You need two things to get this outcome—fast growth (about 5%) and collecting taxes. The solution in the Greek case might be as simple as default and restructuring coupled with letting the Germans come in with their tax inspectors, as proposed long ago.

The other source of angst is China. We have the utmost confidence in the resolve and capability of the Chinese to manage the transition from an emerging market cheap-goods exporter to a more balanced economy with a middle-class providing domestic demand—but we have a real problem with what’s going on in the stock market. Liberalization has resulted in turnover bigger than on the NY Stock Exchange, as described above. Really? We don’t know whether the Chinese have a penchant for gambling that is stronger than in other cultures, but this is very scary. We have too much talk of “bubbles” these days, with everyone and his brother charging this or that is a bubble. What’s going on in the Chinese bourses is not a bubble—it’s something else and probably something worse. Gambler’s frenzy and despair, maybe. It’s not really comparable but somehow it reminds us of when the yen was so strong (1995) that the land under the Japanese Imperial Palace was worth more than the entire state of California. It’s ridiculous and cannot be sustained.

Both Greece and China offer potentially big reasons for US sovereign paper and the dollar to come back into favor in a big way. But for the moment, we are stuck with the data in front of us, which this week is housing data and durables. We get March existing home sales on Wednesday and new home sales on Thursday, with inventories under the microscope. The WSJ notes that “inventories of new and existing homes on the market are both historically low. In either category, the inventory would last less than five months given the current sales rate. The NAR has said tight inventories have held down resales, and low supplies are probably also lifting home prices.” With rising gasoline prices, rising housing prices could goose US inflation, even if these don’t appear in the statistics for quite a while. We get durables on Friday, but before then, the Markit flash manufacturing PMI for April on Thursday.

And let’s be realistic—everyone will start preparing for the FOMC next week (April 28-29). Some analysts think the Fed can hint at June—again.

We are not quite ready to call an end to the euro correction, but surely the end is nigh. After all, if you like Fibonacci numbers, the euro hit the 62% retracement level on Friday of the sequence between the last high at 1.1036 and the low at 1.0519. A pullback seems to be starting.