The classic Greek tragedies often followed a very clear structure. The hero first suffered from overweening pride, or hubris, which leads to peripeteia, or a turning point in his fortunes. Only then can he move towards catharsis.
Investors rightly doubt that the latest rescue plan for Greece represents its peripeteia moment, sceptical of its ability to extricate itself from its financial and economic quagmire. But after several years of fretting, many investors are shrugging off the uncertainties, at least in the short term.
The debt writedown and eurozone bail-out mean the private sector’s holdings of Greek government debt will fall materially and perhaps allow many investors to refocus on the cheerier prospects of another slug of cheap European Central Bank money later this month.
The estimates for how much banks will borrow from the ECB on February 29 vary wildly, ranging from about €400bn to €1tn. The first dose proved a vital tonic to financial markets and many will hope that a second round will prove equally positive.
Standard & Poor’sestimates the second round take-up is likely to hit €1tn. Given the commercial borrowing costs for banks, €1tn of cheap ECB loans could represent a subsidy worth up to €40bn.
Much of the next Long-term Refinancing Operation installation will be held in reserve to cover any bank debt maturities for the next few years, but extra liquidity will nonetheless ease stresses. The main beneficiary is likely to be shorter-dated debt and highly rated corporate bonds – most investors’ new favourite haven.
The profits from any carry trades could also allow some European banks to retain more earnings to bolster capital, and therefore alleviate deleveraging pressures.
Whether more central bank money will help European equity markets is uncertain, however. A large swath of Europe is facing grinding austerity for years to come.The ECB’s morphine may dull the pain but cannot solve all the underlying problems.