Brit Euro Shock Horror: Part II

March 16, 2010

A week ago we ran a post on MacroScope noting, in part, that Britons have a strange relationship with the euro, sometimes bordering on disbelief that it exists at all. Some new numbers from the monthly Bank of America Merrill Lynch fund managers poll underline the extent of UK scepticism compared with that of others.

For two months, BofA Merrill has asked fund managers around the world what they think will eventually happen as a result of the Greek debt crisis. Four choices are on offer:

1) The Greeks will sort it out themselves

2) The European Union will bail Greece out

3)  Greece will default or restructure in an orderly manner and remain in the euro zone

4) Greece will default in a disorderly manner and exit the euro zone

Guess which region’s/country’s  fund managers have been most likely to predict that Greece will leave the euro zone. You’re right — Britain.

eganscream1Globally, the March poll shows 24 percent of respondents reckoning Greece will handle the debt problem itself , 52 percent seeing an EU bailout and 19 percent betting on an orderly restructuring. Only 2 percent predict default and euro zone exit.

Among British fund managers, however, 11 percent reckoned Greece was headed out of the euro zone. Back in February, this number was  22 percent. No other region/country comes close. No U.S. fund managers, for example, voted for the exit outcome.

It begs the question whether British investors and analysts know something that others do not. Or perhaps they are being influenced by decades of political and media scepticism. If the latter, is there not a danger of making the wrong financial decisions?

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Maybe the Brits do know something the others don’t.

1) The Greeks will sort it out themselves

No nation has contracted this much in history during a recession. In any case, is it sane? If Greece does it, the other PIGS will have to do it as well. ‘Social unrest’ won’t be an adequate description of what will follow in Southern Europe.

2) The European Union will bail Greece out

This is pretty much impossible. It’s against the rules and the Germans are radically opposed. Some window-dressing may be done but nothing substantive is possible. ‘Moral hazard’ arguments play very strong in Germany and other Northern states which would have to sign off on this.

3) Greece will default or restructure in an orderly manner and remain in the euro zone

Greece may yet go to the IMF even though the EU would see this as a black eye. This seems likely to be the nearest thing to ‘orderly restructuring’ that is possible. Again, though, social unrest [already under way] might well render IMF cures impossible to implement.

4) Greece will default in a disorderly manner and exit the euro zone

If you are only a bit pessimistic, you have to assume that things in Greece are going to get horrible over the next few months. Even if their government proposes cuts, it will prove impossible for the Greeks to contract their deficit [after all, their main industry of tourism is going to take a beating this year]. They will be unable to sell their bonds at any price. Social unrest will reach the point that the military takes over, again [will it be the generals, the colonels or the sergeant majors, this time?.

Many countries, like Greece, had political elites which thought that getting into the EU and then the Euro would consolidate the institutions which favour their own personal success and prosperity. For a decade they avoided paying the price for doing this [fiscal prudence]. The resulting blow-up was inevitable. Until now, the EU in Brussels has always managed to fudge round problems and increase its own power at the same time. The UK has always hated this, so from a UK perspective, reasonable optimism suggests that the EU, this time, is going to suffer a very big black eye.

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