“The worst form of inequality is to try to make unequal things equal.” – AristotleNewsflash to the financial world: Greece is set to (scratch that – will soon) default.
And while the warning signs have been obvious, evident, and written broadly on the world’s geo-political walls, it’s only now that Wall Street specifically and the markets broadly (those bastions of policy ignorance and indifference) have started paying attention. And panicking.
This reaction –and fear of a cross-European default/depression – is most recently reflected in yesterday’s news that S&P’s come out and (pre-emptively) downgraded Italy’s – Greece’s rival-in-financial-ruin –
credit rating status from A+ to A, news that sparked a drop in Italian bonds in today’s markets.
As Bloomberg reports in Italy Bonds Fall for Second Day on Credit Downgrade, Greek Default Concern, “‘It’s the downgrade of Italy and the latest, or no, news from Greece’ that’s driving bond markets.”
What’s most interesting, or perhaps (to this policy wonk, at least), most frustrating about this news is that 1) it’s taken this long for the markets to start panicking about the real possibility (reality?) that Greece will default (more a personal/professional complaint of mine to be addressed in another article); 2) the markets continue to fail to understand the political and economic (not just financial) intricacies inherent to the European Union.
Now, what, specifically do I mean by this?
Let’s be frank: not all countries are equal, a fact amply demonstrated within the constraints of this geo-political crisis currently playing itself out across Europe. The European Union (which is, essentially, de facto Germany at this point) WILL – in fact, must – allow Greece to fail. Political and economic influence, weight, and authority – combined with general public opinion and the harsh-yet-manageable effects of Greek default – mean the E.U. will, regardless of sound-bites and public musings to the contrary, sit on the financial sidelines, buttress itself against the aftershock, and allow this particular deadbeat nation to fail.
Those worried about a multi-nation default, however, can be rest assured that the E.U. will do no such thing with Italy (and its equally concerning financial cousin, Spain). To do so – to pull up the ladder, thereby leaving Italy and Spain to financially fend for themselves – would spell socioeconomic and political suicide for the E.U. generally and Germany specifically. In particular, while Greece ‘s failure will devastate the German economy, a dual Italian-Spanish default would destroy it. These 3 country’s political, financial, and economic histories – combined with the intertwined nature of their borders and trading agreements – mean an Italian-Spanish failure would inevitably drag Germany down into the abyss – a fact of which German politicians and economists are sorely aware.
In short, while it’s consistently been behind the political and economic 8-ball for almost a decade (really, Romania seemed like a good idea for a member country?), the European Union is slowly getting its financial house in order and realising that to sustain at least some version of itself, it must recognise that, unfortunately for some member states, some nations are simply worth saving economically, while others are not. This is an economically cruel lesson, but one that will guide the future actions of the E.U. in an at least somewhat wiser direction.
And a final point to the markets: you would be wise to learn the same lesson as the E.U. Remember that Greece will soon fall, while Italy and Spain will watch and wait with their E.U. brethren on the sidelines.
Because, after all, no two countries or defaults are ever, really, equal.
Margaret Bogenrief is a partner with ACM Partners, a boutique crisis management and distressed investing firm serving companies and municipalities in financial distress. She can be reached at [email protected]
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