On Thursday, I said that European leaders looked to be headed toward another round of kick the can on Monday with more delay on approving the next 31.5 billion euro rescue fund payout to Greece.
Friday, it's clear that I was much, much, much too kind.
We're now looking at something I'd call a train wreck.
Not only does there appear to be almost no chance that European finance ministers will vote to approve the cash that Greece needs on Monday -- Greece faces a 5 billion euro bond payment on Nov. 16, and the country doesn’t have the money to make the payment -- but also now it appears like any payout to Greece will have to wait on resolution of a bigger deal that will require eurozone countries to cough up another 15 billion to 30 billion euros (yes, that's very popular in Berlin and Helsinki) or that will require a big write down in the value of Greek bonds held by the European Central Bank (you can hear the screaming from Frankfurt) or quite possibly both. The need for that bigger deal puts in doubt the consensus fallback timetable that pegged approval of the Greek cash payout to the European summit on Nov. 22 -- on the rather questionable assumption that Greece would be able to dig up the cash it needed, somehow, until then.
The problem is that the International Monetary Fund, one of the members of the Troika that is to report on the condition of Greek finances for the November 12 meeting, is pressing the unpleasant truth that even with the latest austerity package Greece is not on track to reduce its debt to GDP ratio to a sustainable level -- defined as 120% -- by the 2020 deadline. Some calculations show that the ratio would be 145% by the deadline.
The IMF is insisting that the eurozone deal with this problem now -- before it signs off any new disbursement of funds Greece. "Dealing with it" would, first, require a formal acknowledgement that Greece needs more time -- an extra two years to 2022, Greece says -- to meet its targets and an agreement on how to pay for it. A two-year delay would require funding of 15 billion to 30 billion euros.
Second, "dealing with it" would require the eurozone to come up with some way -- besides an endless succession of less and less effective austerity packages -- to reduce the Greek debt burden. Any reduction would require the European Central Bank to write down the value of its holdings of Greek debt -- something it didn’t do when private bond holders took their haircut as part of the last rescue package for Greece. So far, as you might imagine, the European Central Bank is refusing to line up at the barber.
There was hope, until Friday, that for the Nov. 12 meeting, the issues could be kept apart. The finance ministers would vote, this plan went, to accept the Troika report and approve the payout to Greece. The sustainability issue would be put off to later. But the IMF has refused to go along with this approach and since without IMF money there is no Greek rescue that stance killed those hopes.
So now it's back to the drawing board. Fortunately, the 5 billion euro bond payment that Greece
is supposed to pay -- and can’t -- on Friday, Nov. 16, is owned to the European Central Bank. The bank does have a technical trick or two available to it that would allow the central bank to roll over the bonds. And Greece has been able recently to sell short-term debt in the markets -- I shudder to think where that debt is winding up -- so it can stumble along for a while as long as the European Central Bank continues to fund the Greek banks that are, ostensibly, buying this short-term Greek debt.
But it's hard for me to see this stand off between the IMF and the ECB getting resolved quickly, especially since most solutions would require either approval from national governments in the eurozone or even worse votes by national parliaments to approve the payment of additional taxpayer money to Greece.
Do I know how bad this crisis will get in the coming weeks? No, I don’t although "pretty bad" seems a reasonable estimate.
Do I know how badly this crisis will shake the financial markets? No, I don’t, although looking at the 0.35% drop in the euro today to $1.27 and another 0.6% decline in the German DAX stock index; I’d say that events will almost certainly hurt European markets. I’d doubt that U.S. and Asian markets would escape damage.
Caution suggests raising some cash today on the very modest uptick in the U.S. Standard & Poor's 500. That gives me a little protection and a little more cash to take advantage of any selling in stocks I'd like to own for the long haul.
At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here.