It’s always dangerous to draw big conclusions when markets react to developments in a crisis. Today we read in USA Today that financial markets are rebounding because a leaked letter from the Greek government indicates they’re ready – if only because they have no choice – to give into to reform demands from their IMF and EU creditors. That, everyone seems to hope, will lead to a new bailout deal and avert a major financial meltdown stemming from Greece’s default on its original deal (which happened on Tuesday when they missed a $1.8 billion payment to the IMF) and the Greeks’ likely exit from the Eurozone:
European markets and U.S. stock futures barreled higher Wednesday after a leaked letter from Greece’s government to eurozone officials appeared to show that Athens is ready to concede to creditor demands over new bailout terms.
The memo, obtained by the Financial Times, comes as eurozone finance ministers were preparing to hold a conference call later Wednesday in Brussels to discuss a last-minute bailout proposal from Athens.
Stock markets, volatile all week, raced higher on the report.
Germany’s DAX index and the CAC 40 in Paris advanced around 3%. Dow, Nasdaq and S&P 500 stock futures were all up 1% after earlier trading flat.
“As you will note, our amendments are concrete and they fully respect the robustness and credibility of the design of the overall program,” Greek Prime Minister Alexis Tsipras wrote in the letter, sent to Brussels late Tuesday.
I’m not sure how this works, though, since Tsipras decided to put the creditors’ reform demands to a referendum and has been openly campaigning for a no vote. I’m not familiar with how the Greek constitution works (or if they even have one) so maybe it’s legal for the government to go ahead and institute a measure after it’s defeated in a referendum. But then what was the point of having it in the first place, if not to give politicians cover for refusing to do what they should do but don’t want to do?
The fact is, though, the Tsipras government really does have no choice. They got themselves in this predicament when they reversed course on spending restraints (or “austerity measures” as the media prefers to call them) and instituted socialist policies that predictably stopped an economic rebound dead in its tracks. Now they need the new bailout, but they can’t get it unless they accept the very reforms they opposed as the basis for their election campaign.
The bigger problem in Greece, though, is that the broader population remains under delusion about the reality that the level of spending to which they’ve become accustomed is simply unsustainable. Worse, so much of the population is entirely dependent on that level of spending, there is no clear way forward for most Greeks if the country ever adopts sane spending policies.
That’s what led to the election of Tsipras in the first place. The people resent being told by creditors that they have to give up their benefits, and they got behind the guy who told them they didn’t have to. The only problem is that he didn’t have the wherewithal to back that statement up – and the IMF and the EU aren’t going to put up with Greece’s nonsense any longer.
Markets breathe a collective sigh of relief when a reckoning is averted, and maybe that’s about to happen with this new deal. But nothing has really changed in Greece because it still has a delusional population and a socialist government that encourages the delusion. That’s a much harder problem to solve – and by the way, America is starting to look an awful lot like that too, in case you hadn’t noticed.