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The three signs that will tell you to prepare for Grexit
Much speculation is made of when Greece will leave the euro, says Matthew Lynn. But until these warning signs are flashing, the end won't be close.
A €5bn payment to the IMF. A last minute bailout from the troika. An emergency referendum on euro membership. If this is Friday, at least one of those must be threatening to push Greece out of the eurozone by Monday. Or perhaps it already has. In the five years since the Greek crisis began, the country has survived more emergencies and last-minute deals than Fifa has investigations. Yet somehow it has kept on pulling through.
By now, the saga has been through so many twists and turns that it has become increasingly hard for even the most diligent investor to keep track of them all. So, to recap briefly, things first began to unravel in 2009, when Greek bond yields spiked upwards as investors started to fret that the government might not be able to pay back all the money it had borrowed during the good years. By 2010 it needed a bailout, and by 2011 the whole of the eurozone was in full-scale crisis as the debt time-bomb ticked ominously closer to exploding.
The end is not in sight
Ever since then there have been constant predictions that it is about to become the first country to tumble out of the euro. If I had a tenner for every time I'd read some learned-sounding piece about how Greece was at "five minutes to midnight", I'd be sunning myself on the beach of a Caribbean tax haven by now. Occasionally it is three minutes, or even two. But somehow or other midnight never quite arrives.
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The crisis certainly isn't about to end soon. If Greece gets through this week, then there is a €300m cheque that it needs to send to the IMF on 12 June, and another €600m to pop in the post on 16 June. The summer? No better, unfortunately.
Greece will have toredeem €6.7bn of bonds held by the European Central Bank (ECB) over July and August, and it is going to be hard to find that kind of money behind a sofa. It just goes on and on. Next year, Greece has to repay more than €9bn of debt. In fact, there is already a payment of €6bn scheduled for 2016 and the country is no more likely to have the cash available to hand over then than it does now.
In a world where attention spans have been shortened by Twitter, and every other form of social media, it is surprising that the markets have managed to keep focused on Greece for as long as they have. Sooner or later, everyone is just going to get bored with the endless wrangling, the emergency summits, and the threats not to pay. If you warn about something for long enough, and it doesn't quite happen, people understandably stop paying attention.
Stay awake at the wheel
Yet the fact remains that Greece is still the biggest threat to the financial markets. A Grexit may or may not cause a crash. Who knows, maybe the firewalls have been put in place, and they will prove strong enough to stop the markets collapsing. But it will certainly trigger a major correction. If global markets fell by only 10% on the event, central bankers would probably regard that as a pretty good result.
When it happens, it will still destroy a lot of wealth. So how do you stay awake at the wheel? There will be three telltale signs that the end is nigh. Watching out for these and ignoring the rest of the chatter is the best way to avoid Grexit fatigue.
First, the ECB will accelerate QE,and do so for no apparent reason.If Greece is about to collapse out of the euro, the central bank will be the first to know about it not least because it might well be the one pulling the trigger.
In those circumstances, the top priority for the financial engineers in the central bank's boiler room will be flooding the market with liquidity. They will know that there is a high risk of the banking system seizing up as global investors take their money out of the eurozone, and will be determined to make sure there is plenty of spare cash washing around.
Secondly, there will be rumours of an emergency aid package being prepared. If Greece does crash out of the single currency, no one will want to see the country collapse into anarchy, and possibly into the Russian sphere of influence.
It will need lots of dollars and euros, and indeed pounds, to get through the first few months with its own currency it will be a while before people are willing to swap oil or medicines for new drachma. Germany won't let Greece crash out until that plan is in place and neither will America.
Thirdly, the interbank money markets will start to freeze. Nothing ever happens in complete secret, and if an exit is genuinely close, the banks will stop lending to each other, just as they did in the early days of the credit crunch.
They won't know who will wind up with the big losses, or which one of them might be bust and until they do, they'll stop lending to one another.Once those warning signs are flashing, the Grexit will be genuinely close.Until then, investors can safely ignore the endless speculation about a Grexit.There is no need to pay any attention until it is one minute to midnight and perhaps only ten seconds.
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Matthew Lynn is a columnist for Bloomberg and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years.
