Feb. 17--It's back to the future in the Eurozone with Greece's massive debt problems rising once again.
It's a reminder that Europe stuck its finger in the dike of its debt issues a couple of years ago without resolving them.
Again, Greece's inability to pay its debts has re-emerged as a threat to the eurozone and potentially to investors globally. And again, as Greece and European finance leaders haggle over restructuring Greece's debts, analysts are warning investors that stock and bond markets could be shaken if negotiations fail, and Greece goes bankrupt and leaves the eurozone.
Talks between Greece and stronger European country leaders over looser terms for Greece collapsed Monday, stoking concerns that there would be no deal and that if Greece leaves the eurozone, other struggling countries -- like Portugal or Spain -- could suffer the same fate.
Still, there is virtually no obvious queasiness in the markets -- a huge contrast from 2011 and 2012. The European Stoxx 600 index rose slightly Tuesday and is up 10 percent this year, while the Standard Poor's 500 is up only 2 percent.
Why such a calm over Europe?
Perhaps investors are older and wiser after panicking over European debt in 2011 and 2012 and also about the U.S. debt ceiling dramas of 2011 and 2013. They now expect bluster between finance ministers and negotiations stretching to the wire at the end of February. But ultimately they assume a restructuring will occur before Greece confronts unaffordable debt payments.
Investors are being calmed by the optimism of people like Robert Doll, who is Nuveen Asset Management's chief equity strategist. "It appears that a Greek restructuring deal may be on the horizon," he said in a report distributed this week.
Further, analyst Jeffrey Meli, of Barclays, notes that investors feel confident because central banks throughout the world, including the European Central Bank, are committed to stimulating troubled economies.
While the calm was reinforced Tuesday by an announcement that Greece and eurozone finance ministers would go back to the bargaining table Wednesday, some analysts painted a bleaker picture.
"Although the failure of eurogroup finance ministers to reach a deal on Greece's near-term financing needs on Monday elicited little response from markets outside of Greece, this calm may not last," said London-based Capital Economics in a report.
"We think this failure has raised the risk of a Greek exit from the eurozone significantly," Capital Economics said. "What's more, the mechanisms in place to prevent contagion are not as bulletproof as many think."
So far Greece and the European Monetary Union governments seem a tremendous distance apart. Greece says it isn't seeking more loans, but rather wants relief from austerity measures that other European countries required in exchange for billions in loans previously. Greece, which has almost a 26 percent unemployment rate, claims that European requirements are so burdensome Greece can't grow out of its problems.
Stronger eurozone governments, such as Germany, are insisting that Greece needs to stay with austerity measures and keep a sizable budget surplus on hand.
"The governments still believe Greece will accept any conditions to get more cash to avert a default" on the loans it already has, said Carl Weinberg, economist for High Frequency Economics.
While investors hope negotiations will patch Greece's problems, Weinberg notes that Greece at any time could upset bond investors if the eurogroup doesn't grant the country "an aggressive restructuring plan" for its debt. Greece could "tell its creditors that it has run out of cash and cannot make payments that are due, either now or anytime soon."
"In a disorderly default, institutions holding bonds will have to recognize the losses, charge profits and allocate reserves against them in one big hit," added Weinberg.
"This is a potential 'Lehman's moment' for euroland," he added, noting the panic in stock and bond markets after U.S. investment bank Lehman Brothers' bankruptcy in 2008.
Besides worrying about Greek defaults to creditors, analysts say investors would worry about how other financially stressed countries such as Italy, Spain and Portugal are handling their debts. Those concerns could cause yields on the bonds to rise sharply, making it harder for those countries to finance their debts. Yet, yields on Italian and Spanish bonds are near record low levels, suggesting little worry now.
While a Greek default and exit from the eurozone, would probably cause investors to flee to the safety of German and U.S. Treasury bonds, Morgan Stanley's global strategy team says a bailout agreement between Greece and finance ministers would probably set off a strong European stock rally.
The team said in a report: "We suspect that Greek volatility is holding back global managers who would otherwise buy Europe."
gmarksjarvis@tribpub.com
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