Hasenstab on a Possible “Grexit”
By Michael Hasenstab
June 1, 2012
The Greek debt drama looks to be entering its final act. On June 17, Greek citizens will cast their votes to either elect a pro-austerity government that would keep the economically eviscerated country in the eurozone, or leave the union and go it alone. Dr. Michael Hasenstab, Templeton Global Bond Fund portfolio manager and SVP and co-director, International Bond Department for Franklin Templeton Fixed Income Group, expects either option is going to be painful for Greece, so the big question in his mind is whether the world is prepared for either outcome. A summary of some of Dr. Hasenstab’s thoughts on what Greece’s next move may mean for investors:
- Hasenstab believes an exit from the eurozone would probably create more financial hardship for Greece than accepting the austerity required to stay.
- Hasenstab thinks a Greek euro exit “could break either way.”
- The ring fences appear to be in place in the rest of Europe, and the ECB is not likely to stand back, in Hasenstab’s view.
- For the euro to survive, Hasenstab thinks some hard rules about long-term financing need to be put in place.
- The debate in Europe has been austerity vs. growth, but to Hasenstab, it’s not a question of “or,” it’s a question of “and.”
- Both Spain and Italy have been undertaking noteworthy liberalization of their labor markets to help improve growth.
When it comes to Greece, there seem to be more questions than answers right now. How much of the rest of Europe is willing to support Greece if it stays in the eurozone? How much austerity is Greece willing to absorb? Will the public institutions that have outstanding loans with Greece be willing to accept haircuts? Are global financial institutions prepared for a Greek exit, or “Grexit?” Dr. Hasenstab believes all of these questions should find answers over the next couple of months, but investors are probably going to have to live with some market volatility in the interim. In his words:
“Unfortunately Greece’s finances have been terminal for quite
some time and now we’re approaching an election which will really be a
referendum on whether Greece chooses to deal with some of the hardships
of austerity or if it chooses to try to leave the euro. Both will be
incredibly painful, but I believe if Greece leaves the euro it will
probably create more financial hardship than accepting the austerity
that would be required to stay in the euro. I think the situation is
going to be very volatile. It could break either way. An important
question for investors, though, is really whether the rest of Europe is
ring-fenced, should the situation deteriorate meaningfully. And I think
the answer is yes, the ring fences are in place. The European Central
Bank (ECB) has the balance sheet showing the commitment, so in order for
the domino to fall from Greece to the rest of Europe, it would require
Spain and Italy to be messing up considerably—and I don’t think they
are—and the ECB to just basically stand back. I think that is very
unlikely; I think it would come in aggressively.
The last component—which is important—is that Germany and France
continue down this path of setting up a fiscal union and passing this
fiscal compact. It’s going to require some political compromise. Germany
won’t get all the austerity they want (the timeline might be moved out a
bit), but ultimately there needs to be an agreement to hard rules about
long-term financing that needs to be put in place. If that can happen
then I think we can have an anchor for the survival of the euro.”
Of course, debt problems haven’t been limited to Greece, and neither has the austerity backlash. Elections in France in early May saw incumbent Conservative Nicolas Sarkozy ousted by Socialist Francois Hollande, who favors shifting Europe’s policy focus to growth over austerity. That message seems to be resonating with many people, but Hasenstab says it’s important to remember political promises don’t always play out after the polls are closed. And, he doesn’t believe growth and austerity are mutually exclusive goals, either.
“The debate has been framed so far as austerity versus growth, and that is completely incorrect. It really needs to be austerity and growth. There is no getting around control of the finances, which means some form of austerity—which doesn’t necessarily all have to be frontloaded—but over the course of the medium term, there’s no question that government indebtedness needs to be capped and brought under control, so that is an anchor to prevent yield premiums from exploding.
At the same time, though, growth is important and growth doesn’t just mean spending money; growth means liberalizing the economies. And this is where a number of countries have actually made some pretty good steps. Both Spain and Italy have been undertaking fairly important and noteworthy liberalization of their labor markets to help improve growth. So it isn’t just about spending but it’s also about liberalizing the economy. As long as that track continues of capping the fiscal situation, preventing debt from exploding—which means some austerity, but also promoting growth through greater liberalization—that is a track that I think could be very constructive. It’s not a question of “or,” it’s a question of “and.” However, that is not the case for all countries; in Greece, the politics remain incredibly divisive and probably will for some time.”
Anchoring on a Long-Term Thesis
No matter what happens in the eurozone, or elsewhere for that matter, one thing that’s unlikely to change is Hasenstab’s steely resolve to stick with an investment process that’s focused on the long term, and which doesn’t react to headlines. To underscore that point:
“We are doing what we’ve always done and we have no plans of changing. The Franklin Templeton philosophy is for the long term; having a fundamental, research-driven process that isn’t focusing on the quarter, or a couple of quarters, but a couple of years out. That has always been the framework in which we have looked at problems as well as opportunities in the marketplace. Probably today more than ever, I think it’s the only way to get through periods of volatility. You have to anchor yourself on a long-term thesis. If you focus so much on the short term, you’re going to be whipsawed.”
Having a hands-on, team-based approach is also an important characteristic of that philosophy, says Hasenstab.
“We are fortunate to have this huge footprint of resources spread throughout the globe, so we can really get into the nitty-gritty, get our hands dirty in each individual country to really understand the fundamentals.”
The end of the Greek drama has yet to be written, and how it might affect investors remains to be seen. What do you think will happen? Will Greece stay or go?
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