Hellenic headaches

Life for wealth managers would be so much easier if the eurozone would just behave itself. According to a BNY Mellon investor relations survey published in December 2012, 76 per cent say the eurozone is the key driver in market confidence. It's a major concern for western European companies but still of great importance to those in North America.

With the recent press coverage of the Cyprus crisis and the Greek "bail out" still fresh in memory and far from certain of success, one could be forgiven for seeing this as a Greek problem. However, might that be too simplistic?

Let's go back to the beginning. Greece joined the euro in 2001 when the yield on its ten-year bonds was 5.36 per cent. Now fast forward to 2008. Cyprus and Malta join the euro and the first shock to global markets hits: Lehman Brothers files for bankruptcy. This hit all economies, but some, such as Greece, were less well placed to weather the storm.

Another global blow struck in 2009 when investment company Dubai World proposed to delay repayment of its debt. This threatened to be the biggest debt default since Argentina in 2001. At this time the firm had debts of US$59bn.

Emergency summits

In 2010, Greece struggled. The yield on ten-year bonds went up to 6.24 per cent. EU leaders held emergency summits asking: could Greece stay in the euro? During the year, yields rose again to 7.4 per cent. A €110bn rescue package with an agreed €30bn of cuts led to the yield on ten-year bonds rising to 12 per cent. The bonds were cut to a junk rating by most agencies.

The next year was no better: more austerity measures and a lot more politics. It's one thing having a policy, it's quite another implementing it. By October, ten-year bond yields rose to 25 per cent. Then 2012 finally saw a debt restructuring by March. At the end of the year, the Greek finance minister was saying that default on debt, and a consequent exit from the eurozone, was still a possibility. Greece has received €240bn in EU and International Monetary Fund finance.

While Greece waits to see if its austerity policies work, the outcome for Cyprus is in the balance. The banking crisis and its solution pose challenges. Cyprus has become the first eurozone member to impose capital controls. The European Commission has indicated that while such controls may be applied on grounds of "public policy or public security", it expects the free movement of capital to be reinstated as soon as possible.

There are concerns that where banks are undercapitalised, authorities will look to shareholders, bond holders and depositors to help recapitalise and not for government help. Does this mean the end of the European Stability Mechanism?

Big adjustments

Fundamentally, the economic problem lies in high current account deficits brought about by a loss of competitiveness and high private sector borrowing. Greece, it is true, had other problems of overspending. Governments have had to refinance banks and other institutions leading to increased public debt. How governments reduce current account deficits has a big social impact; negative impacts can reduce the effectiveness of the policy.

There are big adjustments to be made. Policies have to be sold, which is sometimes difficult when elections loom. Economists, now more than ever, need to explain the implication of alternative policies: political economy rather than macroeconomics.

It was British economist John Maynard Keynes who said: "If economists could manage to get themselves thought of as humble, competent people on a level with dentists, that would be splendid." In my view a few more 'dentists' would be very helpful now.

Mick Jones is managing director of thewealthworks

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