A pretty key point from UBS floor guy Art Cashin.
Basically, ever since Lehman, markets have operated with an implied “put” from governments, as they believe that if things get really bad, then authorities will step in to stop the carnage.
But the Greek elections threaten that for the first time, as governments may not be able to thwart the will of the people any longer.
Here’s what Cashin has to say today.
Could The Greek Elections Cancel The “Rationality Put” – Many floor types think that there is a kind of “rationality put” in the markets. It evolved in the post-Lehman chaos. The premise goes something like this: world leaders were shocked and stunned by the scope and size of the nearly instant damage from Lehman’s fall. That shock caused them to rescue AIG, a far, far bigger project than Lehman.
Since then, central banks and governments have stepped in quickly as each new crisis emerged. (Think things like QE; LTRO; the first Greek bailout, etc., etc). As long as the crises remained in the financial arena, they could be softened and postponed (not cured). Now it is likely there will be a new Greek election and the risk that the Greeks may see it as a chance to make a loud and clear anti-austerity statement. Others, however, seeing the proximity of payment deadlines, and such, may see it as a vote on exiting the Euro.
As my very sage UBS associate in London, Paul Donovan, succinctly put it:
The elections are really about default or not default, but the risk is that they are cast as Euro or not Euro. That is a risk, because if it seems that parties characterised as “not Euro” are going to do well, investors, bank depositors and exporters to Greece may react as if Greece were leaving the single currency.
That presents a problem for governments and central banks. If people begin to believe that Greece will soon exit the Euro and the Eurozone, as we noted last week, it could ignite runs on the banks. First in Greece then quickly Spain and Italy. Would there be a rush to things like capital controls?
It’s hard to exercise a “rationality put” if things turn irrational beyond your control.