Has Greece put QE on the back burner

An inauspicious start to 2015's first full week of trading, as developed equities fell sharply on Monday.  Money managers have come back from the Christmas break to see the same issues continuing to affect sentiment. The oil price fell to $50 a barrel for the first time since 2009. We are only a few days into the month so it is too early to tell how the year will turn out, but there is a believe that the trend at the start of the year dictates the performance for the rest. According to the stock trader's almanac in a study of the past 40 years, if the first five days of trading sees the market rise, 85% of the time the market ends the year higher than it started.

 

Ahead of the euro area inflation data later in the day, on Monday Germany reported their year on year inflation rate fell to 0.2%; month on month there was no inflation. There is no reason to expect numbers later today will show anything but the euro area inflation rate creeping ever closer to zero. The expectation will once again turn to the ECB as to when they will act and openly buy government bonds, as the yield on the German 10 year bund has now hit 0.5%.

 

We did point at the start of December that the issues of Greece, considered by Germany the poster child of irresponsible behavior, would rear its head again after the meetings with the Troika in late November failed to find an agreement for the next bailout reimbursement.

 

We often refer to the game of chicken played between Greece and the rest of Europe. The Greeks play hardball over austerity measures, assured in the belief that ultimately the rest of Europe has more to lose by Greece leaving the euro rather than caving in to its demands.

 

Once again we appear to becoming to the point of collision. Wolfgang Munchau writing in Monday's FT puts forward the view that Greece needs to restructure its debt, and this can't happen whilst it remains within the euro. Greece has already restructured its debt in March 2012, remaining within the euro on that occasion, and probably believes it will be able to do so again. Europe in the form mainly of Germany keeps the pressure on by claiming that they are prepared to wear a Grexit of the euro, and so the game of chicken carries on.

 

Mario Draghi may be contemplating quantitative easing, but he must also be waiting to see how this latest game of chicken pans out before he decides to move. Whilst this current situation exists Mario Draghi cannot introduce QE. If he initiates QE and does not buy Greek debt, what does that signal to the market about the ECB's stance on Greece? On the other hand if he does move and includes Greek debt only to find they do engineer a Grexit he is left holding Greek debt worth a fraction of what he paid for it.

 

The reality remains there is no exit mechanism, and the euro is not a European problem, it is a global one. If the euro did not exist would they create it now? Probably not, but now it does exist by finding a way for one country to leave creates more problems than it solves, in the same way letting Lehman go to the wall did in 2008.  But for now those hoping for Mario Draghi's silver bullet may have to wait a little longer. The next ECB rate meeting is the 22nd of January, 3 days before the Greek election.

 

Posted on January 5, 2015 .