Margareta Pagano: Is there a Plan B to give Greece a soft landing?
The markets stay calm as tempers flare up again
Margareta Pagano is a former business editor of the Independent on Sunday who now writes columns and business interviews for a range of publications, including the Independent, Independent on Sunday and London Evening Standard.
Sunday 19 February 2012
If you look closely at what's been happening in Greece this week, there are two quite different stories emerging.
On the one hand, we've seen the Greek politicians engaged in fiery slanging matches with the Germans over the terms of the bailout. They are, for the most part, the same politicians and officials who manipulated, some would say lied about, Greece's entry into the euro at the wrong price and the wrong time, and who are now intent on saving face. In riposte, many German and Brussels officials have been equally inflammatory, with some showing a flagrant disregard for the plight of the Greeks protesting in the streets. Yet the financial markets are ignoring the rhetoric and are behaving remarkably calmly, so calmly that several euro brokers I have spoken to suggest that, despite the posturing, the politicians are now working behind the scenes on a managed default. More pertinently, the markets now believe the eurozone will survive Greece defaulting and that the risk of contagion spilling over to Portugal and Spain is no longer so great. So what's going on?
Over the past few weeks, the cost of borrowing in the eurozone has dropped sharply. Corporate bonds – 10-year AAA-rated, euro-denominated bonds – have gone from yielding, on average, 3.8 per cent at the beginning of January to 3.4 per cent today. Even the same maturity sub-investment graded "junk" bonds have seen yields drop by an average of 1.5 percentage points since the beginning of the year, a huge drop. Sovereign bonds have shown similar falls – Italian 10-year yields have fallen from 6.9 per cent in January to 5.6 per cent now – despite a downgrade to junk.
Why the change? Louise Cooper, rising-star analyst at BGC Partners, suggests the markets are so much calmer for two reasons; they've been beaten into a temporary submission by the ECB's big bazooka, but also there is a growing realisation that a Greek default doesn't have to be messy. As Cooper says, the ECB's LTRO bank-lending programme is proving a success by providing more liquidity. Investors and traders are more comfortable with a default as they are more confident that most of Europe's banks and financial institutions are on a sounder footing. But there's also the acceptance that even if Greece were to bow down and hand over its Treasury to Berlin, the debt problem isn't going to go away. Even if Greece pays off the 20 March chunk of debt, what happens after that, and after that?
The Greek economy is contracting faster than at any time over the past decade. Gross domestic product has fallen by some 13 per cent over the past four years and the latest forecast is that GDP will fall another 7 per cent by the end of this year, a gigantic fall. Unemployment is at a staggering 21 per cent and this latest austerity plan will see hundreds of thousands more out of work. The privatisation programme is more or less on hold, the tax take will fall even more, while welfare payments may have to rise despite the cuts; the vicious cycle is self-evident. That's why the markets are convinced that the politicians are working out a managed default that would allow Greece to devalue but stay within the euro, a new "soft" euro band; for those with long memories, not unlike the old exchange rate mechanism. This would allow Greece to devalue by up to 25 per cent and continue using the euro note, but a Greek one stamped with its insignia, thus keeping pride intact too.
It's impossible to know whether such a plan is being hatched, but the markets are usually pretty good at smelling these things out; if it happens, August is the most likely month. No one is going to admit to a Plan B as it would have to be conducted in secrecy with the other eurozone central banks over a weekend, and announced first thing on a Monday to avoid a flight of capital out of the country. The Greek banks would have to be recapitalised, a floor would have to be put under corporate and household debt. Such an arrangement has the benefit of allowing Portugal and Spain to opt out too into a more flexible band, should they need to. And hey presto, you then have a northern "hard" euro area of Germany, Austria, Finland, Netherlands – maybe France and Italy – and trading can start competitively.
The beauty of this would be to put the Greeks in charge of their own destiny again, however fragile.
Whatever happens, it's going to be painful – but an instant resurrection has to be preferable to death by a thousand cuts. The latest news is that Germany's Angela Merkel and Europe's other leaders are confident they can agree the €130bn bailout package at tomorrow's finance ministers' meeting. Fingers crossed.
There's no call for investors to take the moral high ground on BP trio's shares
Reports that BP has awarded shares to three top directors under its three-year incentive plan that ended in 2011 has understandably caused a few frissons, particularly as the oil giant prepares to go on civil trial.
Those receiving the awards include Bob Dudley, chief executive, Iain Conn, BP's head of refining and marketing, and ex-chief executive, Tony Hayward, who resigned after the Gulf of Mexico oil accident that killed 11 men. However, the trio will receive only a sixth of the potential shares awarded in 2009 because BP didn't meet all the performance criteria, such as total shareholder return.
Even so, Mr Dudley is in line to receive 49,356 ordinary shares, worth about £240,857 at BP's current price, Mr Conn has 71,488 ordinary shares, worth around £348,860 and Mr Hayward is eligible for up to 755,512 shares although the one-sixth measure gives him 125,000 shares, worth around £600,000. (All the shares have to be held for another three years before they can be sold).
BP hasn't confirmed the amount but Mr Hayward is eligible for the shares because, under the terms of his departure, he was to be treated the same as other directors even though he left before the scheme ended. It's no surprise some shareholders are criticising the bonuses, suggesting BP should be more sensitive and Mr Hayward shouldn't receive any shares because of responsibility for the disaster.
But are they right to do so? If investors are taking the moral high ground, then surely they should be truly principled and forgo the dividends they earned over this period? By the same token, the UK government shouldn't accept the huge amount of tax that BP pays to HMRC. Shareholders would be on far stronger ground if they objected to the way BP bases its incentive plans on such complex and, frankly, often ridiculous criteria. Get the contracts changed if you object but let's not have this preaching. There really isn't one law for one and one for another.
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