Fundamentals Update: Greece Watch

Europe is still dominating the markets for the wrong reasons. After it seemed like Greece had jumped through all the hoops necessary to release its next round of bailout funds, yesterday we heard that Greece had failed at the last hurdle. The Eurogroup meeting scheduled for 1700 GMT today has been downgraded to a teleconference after the head of the Eurogroup said that Greece had failed to meet all of the demands necessary to receive the next tranche of funds.

It appears that the latest stumbling block between Greece and its next tranche of funds (read welfare) from its Eurozone peers is down to EUR 300mn of extra cuts and getting signed requests from the leaders of Greece’s major political parties that they would implement the cuts agreed regardless of the outcome of April’s general election. This was a bone of contention, the centre right leader, at one point last night, refused to sign the agreement. The Europeans smell a rat, and after dealing with successive failures from Greece to meet fiscal targets it is refusing to give the country the money.

The latest update is that a bridging loan could be arranged for Greece that would cover its EUR 14.5 billion bond redemption coming up on 20th March. However, the other EUR 115.5bn of funds wouldn’t be released until after elections in April. This is not exactly the outcome that the markets were waiting for as it increases uncertainty. Markets would like to know that Greece has enough liquidity to stay afloat for the medium-term, however so far that certainty has not been forthcoming.

The reason is that no one believes Greece will need just one more bailout. What happens when its latest EUR 130 billion of funds dry up? It’s unlikely that Greece will be getting more funds from irate German, Dutch and Finnish politicians who barely hide their contempt for the Med nation.

It’s not just Greek-fatigue that is bolstering markets as Athens continues to flounder, it’s also because since 2010 banks across the world and in Europe have been reducing their exposure to Greece and its sovereign and private sector debt. Barclays announced results last week and it now only has GBP 13 million of exposure to Greece, which is nothing for a Bank the size of Barclays. Added to that BNP Paribas, the French lender, is exposed to the tune of EUR 1.6bn, which is about EUR 3 billion lower than at the end of 2010.

Thus, the markets are not reacting as they once were to negative headlines from Athens because they are less exposed and thus less sensitive to events in Greece. This is also the case for the economic future of the Eurozone. The core is outperforming the periphery and even France, who is also trying to reduce debt, managed to export its way to growth during the last three months of 2011 expanding by a modest 0.2%, while Greece saw its economy contract 7%.

So maybe there are legs to the argument that Greece matters less to the Eurozone now than it did before, and if the European leaders can negotiate an orderly default or exit for the Eurozone then it may only have a limited impact on markets. This may be why European stocks and even peripheral bond markets have proven to be fairly resilient to the current crisis in Athens.