Stocks rallied in Europe and Asia, and the positive mood is showing up in pre-open sentiment on this side of the Atlantic as well. The Shanghai Composite index was up for a second day on Friday, likely indicating that the authorities have finally taken control of the situation. But I do have misgivings about the Greece-centric optimism in the market today.
Greece’s new proposal to its creditors, which will be considered in a major summit meeting on Sunday, has raised hopes that a deal may be near. The ironic part is that the new Greek proposal is essentially a replica of what the creditors had offered and from which Greece walked away two weeks back. We know what happened afterwards — the Greeks held a referendum that overwhelmingly rejected what the creditors had on offer.
It makes no sense for the Greek government to have gone through the enormous trouble of holding a referendum, getting the ‘No’ mandate, and then turn around and agree to those same terms that its citizens had overwhelmingly rejected. But then, there is a lot that doesn’t make sense when it comes to Greece.
We will have to wait till Sunday to find out what the creditors have to say about the new proposal, but we may get some sense of things to come if the Germans or the IMF offer any comments in the meantime. Market participants appear to see a silver lining to all of this, but I am skeptical that this will work. Yes, the Greeks are agreeing to the original set of creditor demands. But Greece’s economic ground reality has shifted from two weeks back; they are in a much worse shape now and likely need to do even more now to get the same results that were being projected two weeks back.
The underlying assumption for the proposal from two weeks ago was that the Greek economy would be flat this year — neither growing nor in a recession. But that’s too optimistic an assumption after the shock of shuttered banks and empty ATMs.
If we do get a deal on Sunday, it will be for political reasons, not because Europe finally got a better deal out of Greece. It will mean that Germany simply could no longer withstand the pressure from France and the U.S., who have been asking Angela Merkel to compromise. We will see what happens, but I remain skeptical and will use today’s all around market optimism to get out of some of the more aggressive positions and get ready for more turbulence next week.
Related podcast interview:
Kim Wallace: Greece Unlikely to Exit – There Is No Alternative to Europe
