May 13/15 – Failing like common people

2015-05-13 9am EDT  |  #Greece #Pulp

In the mid 1990s, after ten years of struggling, a British pop group by the name of Pulp finally broke out. Some of you will know the band, but I suspect a whole swath of my readers will have never heard of Pulp. For my older readers, think about them as a version of the Kinks – a good band, but never really achieving the popularity of the Beatles or the Rolling Stones. For my younger readers, think about them like the Kooks – again, a great band but lacking the same worldwide recognition as other British acts like the Arctic Monkeys.

Pulp’s popularity hit a crescendo in 1995 with the release of their album “A different class.”

On that album is a song titled “Common People.” This song has been called one of the defining tracks of Britpop.

The song tells the story of a young Greek woman. Her father is rich, but she wants to live like “common people.”

For years after the song was released, Pulp fans speculated on the identity of the young woman. There was even a BBC documentary devoted to the subject. But for two decades her identity remained a mystery.

And so it probably would have remained had it not been for the recent Greek financial crisis. The Greek’s negotiations are being led by the controversial Finance Minister Yanis Varoufakis. Although he portrays himself as a man of the people, he is anything but. His wife is the grand daughter of one of the founders of Greece’s largest textile producers during the 20th century. Yanis made his money the old fashioned way – he married it.

The events of the past few months has put Yanis in the spotlight. And with that spotlight has brought some attention to his “loaded” wife Danae Stratou.

It turns out Stratou was the only Greek student studying art at St. Martin’s college during the same time as Pulp’s songwriter Jarvis Cocker. Although no one is admitting it – after all it is far from a flattering song, it appears the mystery has been solved.

Yanis’ wife Danae Stratou is most likely the young woman who wanted to live like “Common People.”

He sure fooled me

I must admit that Yanis had me fooled. The photo ops travelling in economy class on the way to various finance minister meetings were skillfully planned. I had pictured him more like the struggling professor, not some wealthy socialite.

I guess that Burberry scarf is not some knock off he bought on his visit to Hong Kong.

So although Yanis claims to understand the plight of everyday Greeks, isn’t he just as hypocritical as the woman in the “Common People?”

And the real question is whether the Greek people (and government) are also turning on him. Is his hard nosed negotiating style not only pissing off the Germans, but also putting doubts into the minds of the Greek people?

It’s a no win situation

To be fair to Yanis, he has inherited a no win situation. The previous Greek governments have steered their economy into a mess where there are no good solutions. The debt will never be repaid. There is simply no way Greece will be able grow their economy enough to ever hope to make good on their massive indebtedness.

It seemed pretty clear to me that Greece would be better off just leaving the Euro and starting afresh with a clean slate. Yes, it would be painful at first, but there have been plenty of countries that defaulted and then stabilized their economies.

The part of the equation I missed is all the Greek old people with their Euro denominated pension promises. This generation knows that a Greek default will wipe out their meagre wealth. They know a return to the Drachma will not benefit them. For the younger Greeks it’s a no brainer – they should be demanding an exit from the Euro. If Greece stays, even with some debt concessions from the rest of the European Union, they will still have a huge debt burden that will be borne by the younger working age generation.

Yanis is therefore trying to negotiate a compromise which will keep both generations satisfied. That can’t be done. The best he can hope for is a solution where they are both equally unhappy.

Countdown to default?

The Greek financial crisis has slipped off the front page. The markets no longer care about the day to day ebbs and flows of the negotiations. Yet we are in the final innings, with the Greek’s using the last of their emergency credit:

Greece used up ~EU650m reserves from its SDR IMF holdings account to meet loan payment of ~EU750m due to Fund today, Kathimerini newspaper reports, without citing anyone.

Reserves kept in IMF holdings account need to be replenished within one month. IMF agreed over weekend for their use, given Greece's liquidity situation; without use of those reserves, payment due today wouldn't be possible.

The Greek economy is still struggling, with the government unable to meet the Troika’s demands for cuts.

Greece is so far off course on its $172bn bailout programme that it faces losing vital International Monetary Fund support unless European lenders write off significant amounts of its sovereign debt, the fund has warned Athens' eurozone creditors.

The warning, delivered to eurozone finance ministers by Poul Thomsen, head of the IMF's European department, raises the prospect that it may hold back its portion of a 7.2bn tranche of bailout aid that Greece is desperately attempting to secure to avoid bankruptcy.

Eurozone creditors, who hold the vast bulk of Greek debt, are adamantly opposed to debt relief. But IMF support is crucial both for its funds and to sustain political backing for the Greece bailout, particularly in Germany.

According to two officials present at a contentious meeting of eurozone finance ministers in Riga last month, Mr Thomsen said initial data the IMF had received from Greek authorities showed Athens was on track to run a primary budget deficit of as much as 1.5 per cent of gross domestic product this year.

Under existing bailout targets, Athens was supposed to run a primary surplus government receipts net of spending, excluding interest payments on sovereign debt of 3 per cent of GDP in 2015.

With the large surplus now turning into a sizeable deficit, Greece's debt levels would begin to spike again.

It is ironic that we have never been closer to a Greek default, and yet the market could care less. According to the Director of the European division of the IMF:

"It would be foolish for anyone in the policy world not to be worried at this stage," Mr. Decressin said.

The market is underestimating the chance of default

Although many market commentators believe a Greece default will not cause a significant market disruption because;

a) the Greek economy is relatively small

b) the Greek debt is all in the hands of Central Banks and other official government institutions

c) it has been so well telegraphed

I will take the other side of their trade. If the market had been selling off in front of a Greek default then I would be more sympathetic to their argument. But the markets have concluded the officials will avert a crisis. If that assumption turns out to be false, then the markets will get ugly.

As we countdown to the Greek end game, I am expecting the markets to once again get worried. Even if Greece doesn’t default, the markets are overly complacent. Watch for this risk to bubble up to the surface again in the coming few weeks.

No one makes it out alive

Whatever happens, I don’t think Yanis will make it out unscathed. He is far from “Common People” and they will turn on him.

Get ready for some fireworks. Just because few are talking about it doesn’t mean the risk has gone away. If anything, this should only make you more worried.

In the final refrain of the song “Common People,” Pulp sings “Never fail like common people. Never watch your life…. Slide out of view.”

Sometimes all your wife’s Dad’s money can’t help you, and you fail, just like common people.