On Monday, It's China Versus Greece
Fear and greed are both getting a serious workout lately, but Monday will be even more fun than usual because of two big stories that hit over the weekend. First, Greece decided to put the draconian demands of its European creditors to a popular vote, to which the creditors responded by cutting Greece off from new bailout money. Greek citizens, now staring down the barrel of capital controls and/or bank failures, are busily emptying their bank accounts:
Greece's banks may need an injection of fresh emergency funds to operate Monday as people rushed to pull out money after Prime Minister Alexis Tsipras called a referendum that could decide his country's fate in the euro.
Two senior Greek retail bank executives said as many as 500 of the country's more than 7,000 ATMs had run out of cash as of Saturday morning, and that some lenders may not be able to open on Monday unless there was an emergency liquidity injection from the Bank of Greece. An official with Greece's Capital Markets Commission, the markets' regulator, also warned that the Athens Stock Exchange may be unable to operate on Monday without a cash injection into the banking system. A Greek central bank spokesman said it was making efforts to supply money.
The European Central Bank's governing council was expected to hold a conference call on Sunday to review the banks' liquidity condition, said a Greek official, who asked not to be named in line with policy. The Frankfurt-based central bank said in a twitter post that it's closely monitoring developments and would review the situation "in due course."
Some banks were placing limits in daily cash transactions. Yiota Kardogianni, a manager at a branch of Piraeus Bank SA, said cash withdrawals were limited at 3,000 euros ($3,350) daily and ATM withdrawals at 600 euros. Alpha Bank AE had set a daily limit of 5,000 euros for most of its branches since last week.
After withdrawing more than 30 billion euros as the anti-austerity Coalition of the Radical Left, or Syriza, took power, depositors are now reacting to the latest twist in the five-month standoff with European leaders and creditors. One banker said 110 million euros had been withdrawn from his institution as of 11:30 a.m. Athens time on Saturday.
"Greek legislation allows either the Bank of Greece governor or the finance ministry to impose capital restrictions," George Saravelos, foreign exchange strategist at Deutsche Bank AG, wrote in a note to clients. "The extent to which this materializes will depend on the ECB decision over the next 48 hours as well as depositor behavior."
Some branches of Alpha Bank in central Athens that normally open for business on Saturdays remained shut and one carried a sign that it wouldn't open. Only a few banks near central shopping and tourist areas are usually open on Saturdays.
That's the fear side of the story. China, meanwhile, has enjoyed an epic stock market bubble over the past few months which, inevitably, seems to be bursting. In response the government is cutting interest rates and lowering reserve requirements in an effort to support stock prices. Markets love easy money and usually respond to such policy changes with panic buying. This, then, is the greed:
China's central bank cut its benchmark lending rate to a record low and lowered reserve-requirement ratios for some lenders after stocks plunged and local government bond sales drained liquidity.
In the fourth reduction since November, the one-year lending rate will be reduced by 25 basis points to 4.85 percent effective June 28, the People's Bank of China said on its website Saturday. The one-year deposit rate will fall by 25 basis points to 2 percent, while reserve ratios for some lenders including city commercial and rural commercial banks will be cut by 50 basis points, according to the statement.
The easing follows the biggest two-week plunge in the stock market since December 1996 and a four-week rise in money-market rates as lenders hoard cash. While industrial production and retail sales stabilized in May, investment slowed further -- a sign of weakness in infrastructure spending that policy makers are keen to reverse.
"The central bank doesn't want a panic caused by the stock rout to spread," said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. "That would lead to financial instability."
These stories are related in a number of ways, the most important being that they're examples of governments messing with markets that they don't understand and therefore have no business trying to manipulate. Greece would be fine (or what passes for fine for a Mediterranean country) if it had kept its own currency and managed its own affairs. Instead it joined a currency union dominated by Germany (!) and now, surprise, can't function in that environment. But rather than letting market forces sort out the value of various pieces of sovereign debt, a bunch of bureaucrats in Brussels are making things up as they go along, piling mistake onto mistake and bringing the global markets to the brink of crisis over a country that could literally be bought out with a couple of years of ECB quantitative easing funds.
China, meanwhile, has spent the past couple of decades directing an infrastructure build-out that in retrospect was maybe twice as big as it should have been. Now it's fiddling with all kinds of imperfectly-understood fiscal and monetary levers, trying to maintain a 7% growth rate that is looking more and more fictitious. Here again, the best way to deal with a bubble is to not let it happen in the first place. The second best way is to let it pop and allow the market to clean up the mess. The absolute wrong way to manage a bubble is to intervene from the top to keep it going. Look where that has gotten Japan and the US.
Anyhow, Monday will be interesting because Greece is scary and China is exciting, and traders will have to decide which to fixate on. This has meaning beyond the market open because most news can be interpreted in various ways. So the real story is not the event but how the markets respond to it. When investors and traders are optimistic they interpret everything as a reason to buy, and when they're worried everything is a sell signal. Monday's open will therefore say more about market psychology (and the direction of asset prices in the next few years) than about whether Greece or China are doing well or badly.