Global Agenda: Cracking up and breaking down

It is no longer possible to relate to any official statement or state of affairs as valid for longer than a few hours, sometimes even minutes.

By PINCHAS LANDAU
November 4, 2011 06:51
4 minute read.
A trader looks at graph [illustrative]

Trader looks at market graph 311 (R). (photo credit: REUTERS/Tony Gentile)

Acouple of weeks ago, I wrote about “broken markets,” highlighting the way markets were overreacting to every piece of news by shooting upward or downward. Since then, that phenomenon has gotten rapidly getting worse and is extending far beyond the financial markets. The political system, at least in Europe, is now totally dysfunctional.

A single example will serve to illustrate the sorry state of the financial markets: On Thursday morning the German stock exchange’s main share index, the DAX, opened down by more than 2 percent from its close the previous afternoon. But within two hours it was up by more than 2% from that same opening point; i.e., a move of some 4.5%. As the day wore on, the index continued to rise and fall in movements in excess of 1%.

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It is worth adding that on Wednesday this index recorded a sharp rise, but that came after Monday’s massive drop of over 5%, which itself canceled out the previous Thursday’s huge rise of over 6%... you get the picture.

This is not atypical, rather the opposite. All financial markets are behaving this way recently, with the intensity of the volatility increasing over time. The explanation usually cited for this weird behavior is that there is an unusual degree of uncertainty – and this is true. Indeed, it is not merely factually correct, it is an existential condition. It is no longer possible to relate to any official statement or state of affairs as valid for longer than a few hours, sometimes even minutes.

Thus the great (second) bailout of Greece, a grand plan that envisaged deploying more than 1 trillion euros, fell apart between last Thursday and this Monday (hence the markets’ abrupt lurch from euphoria on Thursday to depression on Monday). The final nail in the plan’s coffin was the announcement by Greek Prime Minister George Papandreou that there would be a referendum in which the entire Greek people would vote on whether to accept the terms of this plan, which would entail many years of austerity and suffering on their part.

Let’s dwell on this for a moment. The Greeks, inventors of democracy and participatory government, would decide their own fate. Sounds right and proper? But most Greeks are not keen on suffering many years of austerity and depressed living standards, especially if the primary beneficiaries are German and French banks. So the referendum would result in a “no” vote – which would not only destroy the plan to save Greece, but also push that country into bankruptcy and out of the European Union. It would open the way for other weak countries – Portugal, Spain and probably also Italy – to go the same way. In short, it was a recipe for disaster. The people should not be allowed to vote on the plan.

In fact, the same polls that show the majority of Greeks opposing the plan also show an even bigger majority desirous of staying in the euro. In other words, the Greek people want their debts expunged, but without severe and prolonged austerity.

Unfortunately for them, that outcome is not on offer.

Hardly surprising, then, that Papandreou’s decision – which he didn’t even tell his finance minister about, let alone his European “partners” – incensed the said partners; i.e., Germany and France. He was summoned to be disciplined by the German and French leaders, now universally referred to as “Merkozy.” Then came two days of endlessly conflicting reports: the referendum was on, no it was off; Papandreou was resigning, no he wasn’t; his government would fall and there would be elections – no, it would expand into a national-unity government; under his leadership – or someone else’s. Each news item sent the euro zooming up or down against the dollar, caused share prices to jump or slump and sent the bonds of the Greek, Italian and other governments racing higher or lower.

This was not uncertainty, this was – and is – chaos. The great irony is that the G-20, comprising the leaders of the biggest countries in the world, gathered at Cannes yesterday for a summit – but none of them, nor all of them together, are in control.

To some degree, it may be said that Greece is the tail wagging the dog, but the bitter truth is that the European sovereign- debt crisis – and, ultimately, the global-debt crisis – is beyond the ability of any country or group of countries to resolve without great pain being inflicted. And since there is no readiness to agree to how the pain should be shared, there can be no substantive agreement about anything. Instead, all that governments can do is apply the kind of symptom-treating painkillers that we have seen again and again over the last three years.

The markets, inevitably, are cracking under the pressures being generated by the growing financial stress and by the failure of the politicians – at the level of individual countries, regional groups and global organizations – to address the root problems. The historical record shows that periods of intense volatility end in major crashes, and there is no reason to believe that “this time is different.” In the face of markets going crazy and breaking down, the prudent thing to do is to get out of the way, to the greatest extent possible.

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