When it Rains, It Pours

There are three developments today, which while not driving the market, are important for many investors.  The first are comments from German Finance Minister Schaeuble and EC President Juncker.  The second is an important development in Poland.   The third are growing problems in Greece.

Schaeuble is formally acknowledging what investors have known for some time. The Schengen Agreement, which opens the internal borders in Europe, is at risk.  This agreement pre-dates EMU itself.  So how serious is it if there are internal border checks?  Juncker, not known for mincing words, said today that without Schengen, there is no point to the euro.

This points to the risk of an existential crisis in Europe that would make last summer’s anxiety over Greece seem like child's play.  The poor growth, high unemployment that Europe has largely been unable to resolve (admittedly with a few exceptions like Germany) only aggravates base instincts and latent xenophobia.  The escalation of terrorism contributes to the desire for more internal border checks, but the effectiveness continues to be the subject of much debate.

Recognizing the central place of political will at the very foundation of EMU allowed us to correctly anticipate that Greece would remain within the union in both 2011-12 and 2015.   The same insight, however, makes the potential dissolution of the Schengen Agreement even more significant.

II

Since the election of the Law and Justice Party, the country has moved in an illiberal direction.Today is the anniversary of the lifting of the Swiss franc cap.   Many Polish mortgages were taken in Swiss francs. The issue is how the cost should be distributed. Today, Poland's President is proposed that the mortgages are repaid at a 'fair price" which means less than market prices.

The example used is that in 2007 the franc/zloty cross was around 2.27. At the end of last year, it was 3.91. A fair price, says the President, is 2.80. This would obviously forces the lenders to take the haircut, and hence, their stocks are under pressure, and the zloty itself is at new four year lows vs. the euro. There is also fear that S&P will cut its outlook for Poland's credit rating.

While Poland remains wary of Russia, the magnitude of the shift in the political climate appears to have caught by surprise.   Investors are marking down Polish asset prices.  The shift in Poland can complicate governance issues within the EU.  Not only is there the North-South, creditor-debtor divide, but now perhaps an eastern wing that is on an different trajectory.

III

Greece remains resolved in several important respects.  First, although Greece has tried arguing that there is not need for the IMF, Germany and Eurogroup are insisting on it.   Greece may find that the IMF's conditions for joining are much to its liking.  It is demanding significant debt relief for Greece. Of course, the IMF excludes itself from such efforts.  The other official creditors, including Germany, appear to ruled out any debt forgiveness.  Instead, the creditors want to rely on extending maturities and lowering interest rates, and perhaps postponing when payments must begin.

Second, Greek pension reform continues to be negotiated.  It is particularly important.  Politically, this is where the Syriza government has drawn a line.  In Greece, often pension may help supplement and supplant unemployment benefits.  The latter expires,  The former doesn't.  Early retirements, adults living with parents, and other social adjustments have increased the significance of pensions.  At the same time, they are also part of the important reforms.

Third, the difficult and painful decisions that the Syriza government has had to make within the straitjacket that Tsipras accepted last summer has weakened its legitimacy.  The price of reduced tensions with the EC is greater domestic tensions.

Yesterday the state-appointed board of the Piraeus Port Authority surprisingly defied the government is pushing forward with efforts to renegotiate a new concession contract with the government. Understandably, the Piraeus Mayor and Piraeus Chamber of Commerce and Industry who are on the board want to secure a greater price.  The Greek government has asked China's Costco, the only bid for 51% of the Port, to raise its offer.  Reports suggest Costco may offer a little more, but the port's share price has fallen below the existing offer.  

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