Winston Churchill once said, ‘those who fail to learn from history are doomed to repeat it’, and the way the Greek debt negotiations have unravelled reminds me of the similar situation in Canada 25 years ago. But, what lessons could be learned by traders from that debacle? A brief background on Canada’s failed Meech Lake Accord Following the victory by the federalist side in the Québec 1980 independence referendum, the Canadian federal government set about developing a new national constitution, which was enacted in 1982. The new constitution was agreed to by the federal government and nine of ten provinces with Québec passing. By 1987, the ruling parties in the federal and many of the provincial governments had changed and the new politicians attempted to bring the Province of Québec fully into the fold through what became known as the Meech Lake Accord. In order to take effect, the deal had to be ratified by the federal government and all ten provinces by late June 1990. June 1990 and the Collapse of Meech Lake Some governments ratified the deal quickly and some dragged their feet. Changes in ruling parties over the year meant that with a month to go until the ratification deadline two provinces had failed to ratify and one had pulled out of the deal. In early June, Federal and provincial leaders hammered out a last ditch attempt to save the accord, but only one of the three remaining provinces passed the new terms in time and the deal expired. The Aftermath of Meech Lake Despite all of the dire warnings from politicians and others, the sun did rise as usual the day after the collapse of the Meech Lake accord and life went on but there were major effects that played out over the next fewl years. There was another round of constitutional negotiations that tried to resolve the opposition to Meech Lake and include parties that had felt excluded from the failed deal. The revised accord was defeated in a referendum vote in 1992. No attempts to change the constitution have been made since. The failure of Meech Lake damaged the power base many of the participants. The federal government and the provincial leaders of the three largest provinces (Ontario, Québec and British Columbia) all were soundly defeated the next time they went to the polls. The acrimony caused by the deal’s collapse led to the rise of separatist and regional parties. The immediate effect was the creation of the Bloc Québecois, where separatist federal MPs from different parties joined together to create a new regional party. The 1993 Federal election completed the fracturing of Parliament into regional groupings. Two of the national parties collapsed almost completely to be replaced by the Bloc Québecois and the Reform Party in the west. The winning Liberals gained power from big wins in Ontario and Atlantic Canada. Political unrest came to a head in 1995 with the second Québec referendum which saw the federalist side eke out a small win. Meech Lake and the Markets The table below shows that the Meech Lake crisis did have an impact on trading but not necessarily when one might expect. On a positive news day for politics, one would have expected the stock market and dollar to go up and the treasury yield to go down.
|Market Returns around key Meech Lake Dates|
|4/30/90||month end||4 months||(15.82%)||(6.52%)||(0.54%)||205|
|5/31/90||month end||1 month||7.21%||9.39%||(0.62%)||(79)|
|06/01/90||day before last ditch deal|
|06/04/90||day after last ditch deal||1 day||0.22%||1.10%||(0.06%)||(9)|
|06/11/90||day before MB fails to ratify|
|06/12/90||day MB fails to ratify||1 day||0.81%||1.39%||(0.13%)||12|
|06/22/90||day before Meech deal expired|
|6/24/90||day after Meech deal expired||1 day||(0.46%)||(0.85%)||0.18%||5|
|06/29/90||month end||1 month||(1.06%)||(0.83%)||0.80%||(11)|
|7/31/90||month end||1 month||0.48%||(0.56%)||0.97%||(22)|
|6/30/91||month end 1 year later||1 year||(2.23%)||3.63%||1.90%||(57)|
Market action between December 1989 and April 1990 reflected growing fear the deal could fall through and lead to a constitutional crisis. Canadian stocks fall much more than their US counterparts, CAD dropped half a cent and the Canadian 10-year treasury yield rose from near 9.50% toward 11.50%. The last ditch attempt at a deal took place over a weekend. On the news that there was still hope, market response was mixed. The TSX rallied but less than the benchmark S&P the dollar slipped and the treasury yield fell slightly. This suggested there was cautious optimism emphasis on the cautious. The market did respond to the day that Manitoba failed to ratify the deal, essentially killing it. On June 12th the TSX rose less than the S&P, CAD fell and the treasury yield rose. By the time the deal officially expired on June 23rd, it was clearly already priced in as the TSX outperformed the S&P by falling less, the dollar rose and the treasury yield was flat. Performance over the months of June and July showed that a mixed response to the deal as the TSX underperformed the S&P in June but then rebounded in July. CAD finished up in both months and the treasury yield fell. Over the following year, results were mixed as the TSX underperformed the S&P but the Dollar rallied benefitting from the Gulf War that drove up oil prices, while the treasury yield fall although it still remained above 10% and above where it was in late 1989. What does this mean for traders? Trading action around the death of the Meech Lake Accord 25 years ago shows just how much markets hate uncertainty. The biggest stock market and currency declines took place and treasury yield increases took place in the early months of the year. By June, failure had been pretty much priced in already and the market reaction to the actual news was fairly muted. Similarly, Grexit risks may have already been priced into EUR and action in European indices over the last few days and weeks suggests increasing speculation on the impact a Grexit could have on corporate earnings. In other words, the old adage of enter on rumour, exit on news still applies. Bond markets could react differently and potentially be more volatile this time. European bond yields are much lower now than they were back in 2010-2012 when the bailout deals were negotiated. This suggests a lot of complacency in the system that could be in for a rude awakening. On the other hand, having the ECB in the market with its QE program gives it the ability to manage the fallout. The lessons of 1990 also remind traders that it’s important to be flexible as things can rapidly change dramatically. Six weeks after Meech Lake collapsed, Iraq invaded Kuwait, the price of oil soared and focus shifted elsewhere. Right now markets are fixated on Greece, but this could change to something else at any time without notice. Lessons Europeans can take away from the 1990 Canada debacle 1. By the time last ditch negotiations (like the ones rumoured for this weekend) are needed to salvage something, it’s probably past the point of saving. There’s so much bad blood now between Greece and its creditors that even if an agreement was reached it’s unlikely to be anything lasting and everyone could quickly find themselves right back where they started. Where there’s no will, there’s no way. 2. Even if a last minute deal is reached there is no guarantee that any of the European parliaments will be able to ratify a deal in time 3. Things don’t look good for anyone else trying to bring change to the EU - Negotiations with Greece have gone so badly that it’s highly unlikely EU leaders are going to be interested in hearing from anyone else who wants to bring change. If there’s no mood to make changes for countries in the Eurozone like Greece, it’s hard to see how there would be any interest in dealing with countries outside the Eurozone like the UK. 4. Incumbents/Establishment re-election prospects dropping like stones - It looks like those within the EU establishment who thought the best way to save their own jobs was to stonewall Greece and to maintain the status quo may be in for a surprise. The message that appears to have been sent is that the establishment has no interest in hearing new ideas or in helping anyone struggling in the Eurozone anywhere. Voters in several countries appear to be figuring out that the only way to bring change is to kick out the establishment and bring in new voices. Recent regional election results in Spain and Italy and the Presidential election in Poland suggest a growing mood for change. 5. Nationalist party prospects on the rise - The Canadian experience of a rise in regional parties as voters turned inward after the Meech deal fell apart indicates that we could see nationalist parties and policies come more into favour at the expense of Pan-Europeans. 6. Brexit vote may be just the beginning - A shift in voters among focus away from continental back to local or regional interests and the potential for nationalist or Eurosceptic parties to gain power. This means that we could see attempts in several countries to leave the Eurozone or the EU in the coming years, particularly if Greece leaves and is able to turn around its economy. 7. EU instability could drag on for a long time - Political cycles are positively glacial compared to market cycles with elections taking place only every four years or so. This means it can take a long time to change all the players. In Canada it was over five years between the Meech Lake collapse in June 1990 and the second Quebec referendum of October 1995. EU changes could drag out even longer. 8. Dire warnings and Armageddon prophecies are likely overblown - Canada didn’t collapse with Meech Lake, Greece won’t collapse if it leaves the Eurozone and the Euro probably won’t collapse if Greece or others leave. Anything that is that fragile isn’t really worth keeping around anyway. The Euro could continue in a smaller grouping of countries that are seriously committed to making it work. It’s important to remember that Syriza was elected out of desperation because austerity policies had failed so miserably and caused more suffering than they solved. 9. If things can’t possibly get any worse… I’ve had the feeling for a long time that nobody at the European establishment is worried that Greece could collapse on a Grexit. Rather they appear to be more afraid that Greece would be a success after leaving, expose the EU’s own policy failures and encourage others to follow Greece out the door. It is becoming clear that the EU and Eurozone isn’t a one size fits all solution and that many countries (including the UK) might be better off taking the parts that work for them and leaving the rest. 10. Crises come and crises go - 25 years later, Canada is in a very different place than it was in the middle of 1990. The period between 1988 and 2002 was a time of massive political, economic and financial upheaval, but the hard decisions that were made during that time turned Canada into one of the world’s strongest and most stable countries in the 21st Century. Through this period of national restructuring, Canada benefitted from having a flexible currency exchange rate that enabled the currency to fall through the most difficult periods and help with the rebalancing then rebound as the economy strengthened. Although constitutional change is still a non-starter to this day, Canada has had a lot of successes in other areas. Canada is one of only 9 countries left in the world with an AAA credit rating from all three major agencies and at 1.76% has the lowest treasury yield of all the English speaking countries. In other words, turmoil comes and goes but now, even after the oil price collapse, Canada now is considered by the markets to be a more stable place to invest than the US or UK. A lot can change over time.