‘Grexit’ - just another Y2K bug
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The Greek election on June 17 was billed as ‘D-Day’ for the euro – but apart from some very short-term solace for markets, it’s had the same impact as the infamous Y2K bug. Greece hasn’t left the euro; the Greek tragedy hasn’t materialised.
Most of us recall the turn of the Millennium, when nations were poised for disaster. We expected nuclear power stations to shut down, motorway lights to switch off, our video recorders to die and our teas-maids not to work. Similarly, we woke up on Monday June 18, 2012 and nothing had changed; the euro still exists and we can still enjoy that morning brew.
Behavioural finance studies often highlight the herd-like instincts of the ‘typical’ investor. Since 2007, the ‘herd’ has developed an altruistic approach, and every time one investor screeches bearish news, there appears to be no option but to follow. Is this right? The number of computer failures that occurred in 2000 remains unknown. Some see the lack of major incidents as a vindication of Y2K preparation, but were the lack of computer failures the result of preparation or was the significance of the problem simply overstated? All eyes will now turn to the next big event in Europe as we get the results of independent auditors’ view of the Spanish banking exposures to zombie property loans. Will we make the same mistake again? (Although I must say, Spain scores here a lot more).
It was always unlikely that the vote would swing towards a Grexit. An exit would mean years for Greeks living within the context of a devaluing currency in order to regain competitiveness. In an attempt to bring the national balance sheet in check, this may be a scenario that was 10 times worse than current austerity measures. In other words, they would be burdened with a new currency that’s close to worthless, making life for the consumer almost impossible. Would the Greeks want that? Would you? But let’s not say Europe wasn’t prepared for an exit - most holders of Greek debt had written-off losses through the last restructuring.
‘History’ suggested that we should worry: the Greeks boast one of the earliest defaults on record, when in the fourth century BC, 13 Greek city states borrowed cash from the Temple of Delos and only paid back 20%. Since 1826, there have been five major defaults in Greece, which has been in default for a total of 90 years. That equates to a state of default for about 50% of the time in modern history. The question was did the Greeks want to go for years with economic hardship and exit the euro, or stay in Europe and go for some years with economic hardship? It was always ‘Hobson’s choice’.
Let’s return to Y2K. According to some observers at the turn of the century, the Y2K bug was not the problem at all. The problem lay in Y2038. Do bear with me now: the original Unix timestamp states a date and time as a signed ‘32’ bit integer, with the number of seconds starting on January 1 1970. After 2038 (or so the theory goes), the number will exceed the largest number possible by a signed 32 bit integer. Symbolic for kicking the can down the road?
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Bryn Jones is fixed income director at Rathbone Unit Trust Management
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