It is all too easy to put big issues into neat silos. This often leads people in the financial services sector to see everything in financial terms, failing to appreciate the wider context.
It is all too easy to put big issues into neat silos. This often leads people in the financial services sector to see everything in financial terms, failing to appreciate the wider context. Take the Greek debt crisis. We all know this has heavy political overtones with the political turmoil in Greece set to continue following the re-election of Syriza on 20 September. The Athens government will continue to challenge the terms of the bail-outs but it will do so now with fresh confidence in the changed political climate. The biggest game changer in the never ending tea dance around the unrealistic debt repayment burden facing the Greeks isn’t its own internal politics, however, but the refugee crisis that has ruthlessly exposed the many fault lines just below the surface of the European project. In doing so it has placed a new premium on the preservation of European unity and that will start with preservation of the Euro. And that is when insurers should sit up and take note because it could have big implications, even for the vigour with which Solvency 2 compliance might be pursued. From refugees to financial regulation might seem a big jump but the connections are there. There are three key consequences for Greece, the Euro and wider European integration flowing from the tide of human misery sweeping across Europe. It has destroyed the illusion that the enlarged European Union has any real sense of shared purpose. It has shown how quickly many countries will put narrow self-interest ahead of any deference to European unity. This threatens the whole project. The Germans know that, the French know that and they are both deeply committed to repairing the damage when the opportunity arises. They also know that it makes it even more important to ensure that contagion from the Greek debt crisis doesn’t threaten the Euro. That is when the second consequence will come into play. Germany has been forced to play the bad cop in the negotiations over Greece. Too much of the debt due for repayment in the short-term is owed to German bondholders and they couldn’t cope with the sort of haircut some suggested. Thus Anglea Merkel had to stand firm knowing that her own Parliament was reluctant to jeopardise German economic interests. Roll forward three months and suddenly Germany is the good cop of Europe, opening its doors to tens of thousands of refugees and migrants. In doing so, it is storing up huge political capital among those who care about European unity. It will have a more powerful voice than ever when the negotiations over Greek debt inevitably resume. Germany will also be viewed more sympathetically in Greece where the consequences if it hadn’t opened its borders and pushed the debate about refugee quotas are hard to imagine. Greece would have found it almost impossible to cope as more refugees arrived but without an obvious route open across Europe. What this will mean in hard financial terms is hard to predict. Greece’s immediate debt financing problems are focused on the substantial slab of Treasury Bills nearing redemption. €1.3bn of three-month T-bills were sold earlier in September to refinance a maturing issue, keeping its public finances afloat as it headed towards its general election. The terms showed an easing of the volatility of the first half of this year with the yield of 2.70% unchanged from a last month. The bid-to-cover ratio was 1.30, also unchanged from the last sale. These sales buy time but not much time. The longer they carry on the more likely Greece is to reach calmer waters. If it can pick its way through the remainder of 2015, repaying bond holders as much as possible then calmer waters beckon. As we head into 2016 and beyond the key repayments are due to the European Central Bank and the International Monetary Fund, both removed from immediate political pressures and likely to be able – and willing - to adopt a more flexible stance. This brings the third consequence into sharper focus. No-one will want to force another round of tense Greek debt crisis negotiations while Europe has more pressing issues on its plate. Buy time, wait for the calmer waters will be the word in Berlin, Brussels and Paris, and welcome music in Athens too. In economic terms the big concern is still contagion, especially deepening the north-south divide in Europe. Greek GDP will fall through the floor over the next few years but its limited trading links should mean this can be contained. If it can’t and the instability caused by its debt crisis starts to haul back the gradual recovery elsewhere in Europe, bond yields and corporate asset values will come under pressure. This will become yet another factor forcing central banks to maintain their existing support through QE and low interest rates, even though we might see a gradual lifting of these around the turn of the year. The bottom line for the damaged European project, however, will be the preservation of the Euro. The French and Germans will do almost anything to defend the Euro, discarding previous declarations and even threatening the regulatory structures of Solvency 2 if that is what it takes. They bent the rules to get Greece in and they will bend them even further to keep them in.