Opinion: How to know when Greece is about to exit the euro

MATTHEW LYNN'S LONDON EYE GET EMAIL ALERTS

Published: June 17, 2015 3:00 a.m. ET

Market Watch

Crunch talks in Athens. The IMF flying home in a huff. German ministers leaking that the eurozone can survive a Greek exit, and Greek ministers insisting that austerity can’t be tolerated any more.

If it is Wednesday, at least one of those factors must be threatening to dump Greece out of the euro EURUSD, +0.4234%   by the weekend. Or Monday. Or the end of the month.

It is now five years since the Greek crisis started, and during that time it appears to have gone through as many reboots as Jurassic Park — and with a plotline that is about as familiar. The trouble is, the crisis has been so protracted, and has been through so many twists and turns, that it has become increasingly hard for even the most diligent investor to keep track of them all.

And yet, the fact remains that a sudden and calamitous Grexit remains the biggest risk to any portfolio.

So how do you protect yourself from becoming exhausted by the whole saga — and work out whether this time around the talk of a Grexit might be for G-real? There will be three big clues. An acceleration of quantitative easing from the European Central Bank. An emergency-aid package being put together for Greece. And a freezing of the interbank lending market.

Until all those warning lights are flashing red all the talk of Greece coming out of the euro will be just that — talk.

The Greek debt crisis is already starting to make “Game of Thrones” look like a masterpiece of concise storytelling. It all started way back in 2009, when Greek bonds first started to spike upwards on fears that the country might not be able to pay back all the money it had borrowed in the good years.

A year after that, it already needed a bailout, and the European Union started the game of constant brinkmanship whereby Greece went to the edge of insolvency before being rescued yet again at a late-night summit. Deadlines have come and gone and crunch points have slipped by every few weeks ever since then, and yet somehow Greece still seems to be within the euro.

A succession of wise-sounding experts keep telling us it is five minutes to midnight, or even three or two minutes. But midnight never quite arrives. It is very easy for the average investor just to tune out the whole thing, and stop paying attention.

It is not about to end any time soon. Even if Greece does make it through this week, and manages to scratch together the cash to make its latest payment to the International Monetary Fund, there are still endless deadlines to be met stretching out for years. Greece will have to redeem 6.7 billion euros of bonds held by the ECB over July and August, and at the moment, if anyone has any idea where they will find that kind of cash they are keeping it to themselves.

Next year, Greece has to repay more than 9 billion euros of debt. In fact, there is already a payment of 6 billion euros penciled in for 2056. The country is no more likely to have the cash to hand then than it does now — and we could still be reading the same old headlines about the markets wobbling on the possibility of Greece crashing out of the euro.

So how can you tell when it is just noise, and when do you really have to start worrying about it actually happening? There will be three big warning signs that something more serious is going on than just another wrangle between the government in Athens and its creditors.

First, there will be a sudden increase in QE from the ECB, and one without any apparent explanation.

When a Grexit is close at hand, the ECB may well be the first to know about it, not least because it may well be the institution pulling the plug. The central bank may have put in place lots of firewalls to stop that causing a wider panic within the European financial system. But it will still be worrying about liquidity drying up, and losses that might turn up unexpectedly somewhere.

When it happens, it will want to make sure there is plenty of cash swilling around the system, and the easiest way to achieve that will be by stepping up QE.

Second, stories about an emergency-aid package for Greece will start to appear.

If Greece does come out of the single currency, it will face a very tough six months while it establishes a new currency and gets itself back on its feet. No one wants to see the country collapse into chaos, or fall into Russia’s sphere of influence. In the first few months, it will need financial assistance, simply to pay for fuel and medicines, and probably some technical help as well. Leaks will start to emerge about plans being put in place to help the country, with the lead probably being taken by the U.S. and the U.K., since they will be the two countries that have not been involved in creating the catastrophe in the first place.

Finally, the interbank market will freeze up.

Nothing that big can happen without someone somewhere getting wind of it. The first thing that will happen is the banks will stop lending to one another, because they’ll be nervous that the other guy might be sitting on huge losses. Libor — the rate at which banks lend to each other — will spike upwards just as it did in the financial crash of 2008. A hedge fund in London or Zurich may close as it finds it can’t get a price on some of its more exotic bonds anymore.

Some of those signs are already in place. There is talk of capital controls being prepared for Greece. The ECB has already started talking about stepping up QE. So it may be the case that a Grexit is alarmingly close. But it won’t really be imminent until all three warning signs are flashing — and until then, investors can dismiss all the speculation as just noise.