As long as the ECB funds the Greek banking system, Greece has "won"

Outlook:

You don’t have to be a crank (or an American) to be angry at central banks taking over everything in sight. Free markets, bah. An economist at a German brokerage writes “Indeed, Greece and its bond markets are reflective of the growing reality that the financial system is increasingly being quasi nationalised by global central banks. Whether QE, LTROs, bailout, etc. succeed or not is to miss the point: what all these programmes amount to is the nationalisation of the financial system’s markets, and the trend is far from over. We note that in Japan the BoJ al-ready buys equities and has for some time bought REITs. This trend is in part being forced by regulators curbing banks’ ability to take on risk, which has the side effect of increasing the dependence on central banks as buyers of last resort.”

For the FX market that looks to the 10-year yield spread for directional guidance (and the 2-year in a crisis), the “nationalization” of this most important market means we don’t know what the hell we are doing. It may be true that the Fed can’t directly control the 10-year yield, but in practice, it controls the longer end of the yield curve with chatter and blather about the true end of QE, which comes only with the First Rate Hike and the pace of other hikes to come. We don’t know whether it’s the uncertainty over Sept or Dec or the gradualism that is holding yields back. And it doesn’t matter. The Fed is holding yields back, and this is the most “free-market” way of doing it. In Japan, it’s more direct and in Europe, the ECB is still working on it—it’s early days there.

The German economist is correct—Greece has already won in the form of almost €90 billion in ECB emergency funding. “If Greece really wanted to show the world it was a master of game theory, it should walk away now as the backdoor deal it has effectively achieved is better than agreeing to the measures the Eurogroup is demanding. Greece's incumbent government’s tactics drove deposit flight, forcing the ECB to increases its exposure by circa EUR 90bn, primarily via the ELA. To put this into perspective, Eurogroup leaders are haggling over releasing a further EUR 7.2bn of bailout funds. So, the worst Greece ends up with, keeping in mind that public debt is the people’s debt, is an extra EUR 90bn from the rest of Europe.

“However, agreeing to a deal that on the surface will fail given the focus on higher tax, might just get them an extra EUR 7.2bn as it seems unlikely that those deposits will come rushing back. The core risk of a failure to strike a deal is deposit flight growing beyond Greece as depositors take the view that a euro in one country is not worth the same as in another. A parallel to this was in 1933, when the US was forced to declare a four-day bank holiday before passing legislation that restored confidence.”

This point of view is about as pessimistic and gloomy as any other, but it brings to light that it is indeed the ECB at the center of things, and not the IMF or any other creditor. As long as the ECB funds the Greek banking system, Greece has “won.” And the ECB is loath to pull the plug because in Mr. Draghi’s eyes, that would be a “political” act. Therefore, we probably need to assume the ECB will re-pay its profits from the earlier bailout to Greece.

This perspective also puts US data in the back seat. Hopes that good data will influence the Fed might be mistaken—data has to be overwhelmingly good and there has to be a lot of it to influence the Fed. We can probably dismiss any single bit of good news, like yesterday’s first quarter GDP revision, to -0.2% from -0.7%, which was expected. We don’t find a single analyst saying this should impress the Fed. To-day we get the usual unemployment claims and personal income and spending, but again, nobody thinks the Fed will be moved.

We expect risk appetite to remain sour unless and until we get a Greek deal, and hopes for today are probably not any more realistic than they were the last ten times, last-ditch deadline or not. Yesterday the view was developing that good news on Greece would be bad for the euro but it does seem as though another failure has to be euro-negative—although we are, sheep-like, accepting what is really an institu-tional failure of eurozone institutions. The principle is supposed to be that the eurozone doesn’t subsi-dize one member at the expense of the others, but that is precisely what is happening. Hence, institution-al failure. It’s a puzzle why the euro is not crashing on the loss of confidence, unless we buy the upsidedown carry trade explanation.

Now that everyone is thoroughly confused, we must expect range-trading but choppy range-trading.