The Ongoing Greek Debt Crisis: What will it take for some dramatic change?
Originally posted on Convergex.com.
Summary: The Trojan War lasted 10 years, and the Peloponnesian War almost thirty; in that context, it should be no surprise that the long-lived Greek debt crisis continues to unfold. The big question now is “What will it take to get some dramatic change – what ancient dramatists called catharsis – to end the current round of negotiations?” To answer that we turn to Aristotle, the philosopher who literally wrote the book on the proper structure of drama. His guidelines for good storytelling are useful milestones as we continue to plod along with the overhang of Grexit/Grexodus/whatever cutesy phrase is making the rounds. Good drama needs three things to be complete: unity of action (no subplots), unity of time (ideally 24 hours) and unity of place (don’t jump geographies). With those guidelines, it is easy to see why the drama continues in such an unpredictable manner. Investors like good storytelling, because it allows for predictable outcomes. This particular Greek drama, however, needs a major rewrite.
One of the recurring themes in our work is that capital markets work around predictable narrative forms. Humans, and increasingly their robotic counterparts, follow stories rather than trying to reprice every asset, every day, in real time. Just consider how powerful the “Hero Myth” of one person’s journey has been to the likes of Apple or Tesla’s stock over the last decade. Or think of the power of “Creation Myths” to the anonymously founded Bitcoin with regard to the early success of that online currency or the Hewlett-Packard garage to modern human-capital-rules-all Silicon Valley.
Stories – their structure and the people within them – are the skeleton on which investors hang the muscle and sinew of daily news flow. A well-structured story, such as the power of central banks to drive capital markets, can move asset prices profoundly and over long periods of time. Changing the narrative – something the Federal Reserve is trying to do at the moment – is a tricky business indeed. Something akin to an onstage wardrobe change, it has to be done with a good deal of practice and even then sometimes it still goes awry.
The most dominant story of the week is, of course, the ongoing Greek debt crisis. This has been a long-brewing problem, with roots in dramatic fiscal mismanagement before the Financial Crisis and weedy flowers blossoming every few summers since then. The story line here is muddled in an unproductive mixture of politics, economics, demographics and social stereotypes, not to mention two large scale wars over the last 100 years. That all has proven to be a potent recipe for market volatility, since there is no consistent narrative for investors to follow. Who’s really in charge (who is the ‘Hero’)? What is the ultimate goal of this “Journey”?
The only constant in life is change, as the old saying goes, but we as investors need a roadmap to assess if the world at large is heading in the right direction. In theatrical terms, are we moving the plot along? Where is the climax of the action? When will the main character – whoever that is - undergo the change that the ancients called “Catharsis”?
That term – a dramatic and emotional change in character that creates renewal and the chance for a better life - comes from the Greek philosopher Aristotle. Given the locus of the recent crisis on his home field, I thought it would be useful to review his take on what makes for a good story. Old Aristotle would have been a great stock market analyst, or perhaps a writer at Buzzfeed, because he liked to make lists. Lots of them. In the case of his “Poetics”, he enumerates the 3 key points for a good dramatic plot. They have been reworked by critics through the ages, but essentially they are:
Unity of Action: Have one plotline, and keep it moving.
Unity of Time: The action should take place over a set timeframe, ideally 24 hours.
Unity of Place: The play should take place in one location.
These lessons still work well today. Just consider the success of hit TV shows like “24”, which held to the “Unity of Time”, each season taking 24 hours to complete. Or the 7 Oscar-award winning movie “Gravity”, with its cohesive storyline taking place largely in one location. Comedy – think “Seinfeld”, with its multiple plotlines – doesn’t need to hold to the rules of drama. But to really hold an audience’s attention and create an emotional bond, Aristotle’s rules are still a good starting point.
Against this backdrop, it becomes easier to see why capital markets are in for a confusing week and maybe longer. Following Aristotle’s maxims, here is why:
No Unity of Action. This weekend’s European Financial Ministers meeting highlighted that there are many subplots afoot in the currency crisis. Countries from Finland to Germany to France have their own internal political agendas that deeply color their perspective on another Greek bailout.
In addition, the dominant theme this weekend was one of “Trust” – can the Greeks be trusted to follow through on promises now, when in the past they have failed to do so? While trust may be a universal human trait, it is also a distinctly egocentric one. Everyone likes to think they are trustworthy and prior mistakes should be forgiven. Similarly, trust is an easy thing to lose and a hard one to rebuild. What is “Fair” – another emotional aspect of the current crisis - for the Greek people was the keystone of the recent referendum, and again that is a distinctly asymmetrical calculus. People of all nationalities tend to think of themselves as fair-minded…
The bottom line is that the Eurozone is currently negotiating more like a dysfunctional couple in marriage counseling than the world’s largest economic bloc of sovereign nations. Emotions are running high, but in ways that would make for a disjointed and hard to understand theatrical narrative.
No Unity of Time. Some progress on this one, at least as of Sunday afternoon. There is some talk of forcing the Greek Parliament to pass a series of reforms by Wednesday, including VAT reform and a lockbox for the eventual proceeds of the sale of state assets. There is also the problem of the Greek banking system, which is essentially out of money. Still, it’s hard to shrug off the notion that we’ve been here before and there is no hard-and-fast endpoint to the current round of negotiations.
No Unity of Place. As with the first point, the Greek debt crisis has no firm location. Germany may be the largest lender and Greece the problematic borrower, but there are 26 other countries in the mix. How often do you see pictures of some combination of Angela Merkel, Christine Lagarde, Francois Hollande, and countless other officials in conference with Greek Prime Minister Alexis Tsipras? The action in this drama moves from Athens to Brussels to Berlin and other capital cities so often that Aristotle would pull his hair in frustration. Capital markets feel the same way.
Now, it’s fair to say that the Eurozone was never going to be Aristotle’s idea of a great piece of theater. Too many locations, too many plotlines, too many everything for his liking. And under ordinary circumstances, that level of diffusion is fine. It is the current situation, fraught with risk, which needs a clear storyline in order for markets to discount its outcome. When we have unity of time, place and action, then we will know we are near a solution. Not before.
