Greece and the Deathly Hallows

This weekend’s family activity centred on the final film in the Harry Potter series, Harry Potter and the Deathly Hallows, 10 years on from when we saw the first instalment of the magical film series in 2001. Meanwhile in the Monday to Friday muggle world, the markets are focusing on the modern classical tale of Greece, that also began 10 years ago in 2001 when they entered the European Monetary Union. How will that blockbuster story end?

In the final instalment of Harry Potter, the story centres on the deathly hallows. Spookily, the three elements of the deathly hallows are comparable to some of the magical instruments Greece has at its disposal.

Sadly, they have already used the invisibility cloak to hide the true extent of their debt, in order to gain entry into the Eurozone back in 2001. Unfortunately, for them that magical charm has been exposed and its protection is lost. This leaves them with two further deathly hallows to get them through their current nightmare. They could use the resurrection stone, i.e. they can default and their debt will reappear as a shadow of its former self, remaining in the Euro, but angering the European Central Bank, and investors.  Alternately, they could take the option of using the elder wand to threaten to destroy the whole system, and therefore gain support from fellow Eurozone members to band together to keep their debt whole, the Eurozone dream alive, and the European Central Bank happy. Both give very different economic and bond outcomes. Their fate however, like in the Potter series, is not just in their hands but that of their friends and adversaries.

So what other spells can the participants in this economic fable use? The Greeks would love to cast the “Evanesco” spell (makes the target vanish). This would involve full economic union and therefore making the Greek debt really disappear – a perfect outcome for Greece, unlike the previous attempt to hide it under the invisibility cloak. The Ministry of Magic, better known in the muggle world as the IMF, would love to use its usual magical curse of “Crucio” (inflicts unbearable pain on the recipient of the curse), insisting the over indulgent borrower amends its ways. Hard for the Greeks to bear, but would have the support of the houses of the north. A third potential conclusion to the tale would involve the casting by the invisible hand of the markets (or as politicians might term it, the death eaters) of the appropriately named “Expulso” (a spell that causes an object to explode), the Greeks leave, or are expelled from the Euro, with the potential disorderly reintroduction of a new national currency by the Greek authorities.

Like in this weekend’s movie, battles and losses lie ahead under all scenarios. We think that the “Expulso” conclusion as touched on previously is the likely final denouement. If it happens, it will be very painful in the short term unlike the other options, but in the long term the natural order of national economic stability would emerge as nation states and markets would set domestically appropriate exchange rates, fiscal and monetary policies, thus allowing the efficient distribution of labour and capital, and hopefully an eventual happy ending.

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

Richard Woolnough

Job Title: Fund Manager

Specialist Subjects: Government and corporate bonds

Likes: Running, cycling

Heroes: Mohammed Ali, Winston Churchill

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