By James Mackintosh, Financial Times
Shares in all four of the big Greek banks were down more than 10 per cent for a second day on Tuesday, following the election of anti-austerity party Syriza. The appointment of a self-declared Marxist as finance minister would normally be a good excuse for a sell-off, but Greek shares and bonds were being dumped anyway; investors know how to react to a Greek crisis, even if this time they think it will not spread beyond Greece.
Greek bonds are priced for a heightened risk of default under Syriza, with the 3-year yield above 14 per cent, while the 10-year is still below 10 per cent.
Yet, Yanis Varoufakis, the new finance minister, is an unusual Marxist who advocates “alliances with the devil (eg the IMF)” in order to save capitalism from itself.
There is plenty of scope for Mr Varoufakis and his boss, Prime Minister Alexis Tsipras, to come to a deal with their official creditors, particularly Germany. The austerity demands are clearly excessive, demanding a budget surplus of close to 5 per cent before interest payments. But the focus of Mr Tsipras on cutting the size of the debt – and of German politicians on Greece repaying in full – is daft. Rather than the face value of a loan, it is the total cost of debt and its duration that matter, and also where compromise can be hidden in complexity.
Rational discussions could easily be derailed by popular opinion pushing both German and Greek governments to extreme positions.
Anti-austerity parties elsewhere in the periphery, particularly Spain, will surely demand equivalent relief, but smart spinning of the deal should avoid the need to repeat. After all, none are suffering anywhere near as much as Greece, where a quarter of the workforce is unemployed.
The real danger is that the Greeks themselves lose confidence. There are tentative signs that money is again being sent abroad, as it was in mid-2012. Nikolaos Panigirtzoglou at JPMorgan points out that €350m was sent from Greece to Luxembourg money funds since the start of last week. Extrapolating to all cash flight, he estimates as much as a 10th of Greek deposits may have left already this year. If a Greek bank panic develops it will strengthen the German hand, and make negotiations that much harder.
