It’s all Greek to me

It’s been five years since I’ve written about Greece. Given the market’s current infatuation with that subject, it’s not a bad time to revisit the topic.

To recap: Greece borrowed a lot of money that it can’t currently repay (some would say: can never repay). The Greek government, I’ve read, pays out three euros for every one they take in as tax, so the basic math is unsustainable.

Five years ago, many thought that Greece defaulting would cause a cataclysmic market failure that would lead to a domino effect in multiple markets. At the time, the recency of the 2008-2009 economic collapse made this possibility seem very real and scary. So, Greece was bailed out and given more time to work out its issues.

Greece has not made much headway. When people get used to not paying taxes, they don’t eagerly jump into paying them again. When people get used to receiving government checks, they don’t willingly stop cashing them just because they’ve heard the government doesn’t really have the money. That’s just how most people function.

When a lender lends money, both the lender and the borrower end up with some responsibility. Greece is clearly responsible for paying off its debts. At the same time, the lenders are responsible for lending money to a country that–without massive structural changes–can’t repay those loans. Both Greece and its lender may be indignant, but they’ve both played a part in creating the current crisis.

The basic math says that Greece can’t repay its debts, and that it shouldn’t get additional loans until it reasonably commits to specific measures that will enable it to sustainably pay back its loans. The negotiations between Greece and its lenders that keep failing are about which side has to give up the most.

Greece’s leader was recently elected to make European lenders carry more of the responsibility. He has carried through on his campaign promises by defaulting on loans in order to force a better deal. He has also put Europe’s terms to the test by putting them up for a popular vote on Sunday. I don’t think anyone knows the outcome of that vote.

What is different now from five years ago? There’s been five years for people to alter contracts, make contingency plans, and just get mentally prepared for Greece to default and to potentially leave the euro currency, European Union or the European Community. The damage now wouldn’t be as great as it was five years ago.

The scarier prospect is that Portugal, Spain, Italy, and perhaps even France may end up in the same situation several years from now (they all have structural problems that haven’t been fixed, though none as bad as Greece), and that the European currency/Union/Community could completely come apart. This would not be the end of the world, but it would create a lot of inefficiencies that would slow global growth permanently.

There is always some possibility of a greater market contagion. For example, suppose some bank or government or hedge fund owns a LOT of securities that head south if Greece defaults or dumps Europe. Suppose also that they bought those securities with short term debt and they have to sell other securities to repay their loans, thus forcing down the prices of other, non-Greece related securities. Then, those price declines lead other indebted securities holders to have to sell their securities, etc. You get the picture. I don’t think that is likely, but market contagions have occurred in the past on just such similar lines.

The more important point of Greece’s situation is that governments and people aren’t above the laws of economics. They may not like economic laws, but they can no more be avoided than the laws of physics, chemistry, etc. 

Governments, just like people, can’t spend more money than they take in. 1) Printing money 2) shifting budgets, 3) giving away other people’s money doesn’t create economic growth. Only production creates growth, and governments aren’t productive. The laws of economics will hold up whether anyone likes it or not. The sooner people face that reality, the sooner we can all go back to being productive and growing again.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

It’s all Greek to me


I’ve been writing since December 2009 about how sovereign debt will evolve into the next sub-prime credit crisis, and how it will all start to come apart with Greece.

One of the first really ugly steps down this path began this last week as members of the European Union decided to write down Greece’s sovereign debt by 50% (only 21% for government holders–“All animals are equal, but some animals are more equal than others”).

To commemorate this unraveling, I decided the scariest thing I could turn my Halloween pumpkin into this year was the euro–Europe’s supposed common currency.  At right, that’s my Jack-O-Lantern at the top, with my wife’s cat and my daughter’s Blue from Blue’s Clues below.

My mother-in-law was not, I think, amused by my choice (she’s German), but I was.  Not only was Europe’s plan inadequate, but it also set in motion some market dynamics that may reverberate for some time.

One of the games European officials decided to play was to describe the 50% write-down as a voluntary restructuring instead of a default.  This may seem like a minor technicality, unless of course you own Greek debt and bought insurance on its default (which won’t be honored, now).  It sounds like the Europeans are going to violate the sanctity of contracts, and that has left a lot of folks who bought insurance scrambling, and with big questions.

Can you buy insurance on sovereign debt and really be insured?  It doesn’t look like it.  In fact, the market’s rally last week may very well have been due to investors having to cover investing positions rather than a positive evaluation of Europe’s “solution.”

No, Europe has not solved Greece’s debt problem.  They just kicked the can down the road a little farther (a 90% write-down will more likely be necessary, followed by major structural reforms to Greece’s economy).  

No, this solution will not build confidence that Ireland, Portugal, Italy or Spain’s debt problems can be solved, not to mention Belgium and France (French, German and British banks own a ton of Greek, Irish, Portuguese, Italian and Spanish debt–now you know the real reason why they are searching for solutions).

No, this will not be good for the economy in the long run.  No, this is not a model for solving the same huge problems that exist in Japan and the U.S. (due to Medicare, Social Security, Illinois, California, New York, etc.).

This problem will be with us for a while–probably another 5 to 10 years.  But, when we get past it, the global economy and stocks will go on a 15 to 20 year bull market.  

Until then, we’ll have to be satisfied with lower returns, preservation of capital, and a little amusement as Greek Tragedy justly punishes those who haven’t learned from history.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.


Going Greek

Markets were, again, disturbed by news from Greece this week.

For those of you who don’t pay much attention to these things, Greece is in a serious fiscal bind. You see, their fiscal deficit looks to be around 13% of gross domestic product.

When a country typically crosses the double-digit barrier, their interest rates spike and their currency tanks. Markets don’t like it when a borrower’s revenue falls short of it’s obligations by more than 10%. It indicates the borrower may default.

Greece, however, is in a unique position. It is part of the European Union and has adopted the euro as its currency. The result is that Greece’s problem is really western Europe’s problem.

It reminds me of the joke about borrowing from a bank. When you borrow $10 thousand and are having problems making payments, it’s your problem. But, when you borrow $10 million from the bank and are having problems making payments, it’s the bank’s problem.

Greece is Europe’s problem, and that has markets much more nervous than if it were just Greece’s problem.

Economic and currency unions have not stood the test of time. None have lasted. For this reason, many are skeptical the euro or European Union will last, either.

Greece is exacerbating these fears because many market participants worry that Greece’s problems could break up the union. The euro is down almost 15% from its peak (hopefully this trend will continue at least until my trip to Paris this May), and these issues are part of the reason.

What seems to be lost in this shuffle is that the rest of the world is going Greek, too. The movie in Greece may soon replay in the rest of the world, and by players too big to be bailed out by Germany or France. Niall Ferguson eloquently pointed this out in the Financial Times yesterday.

For example, look at the good ole U.S. of A. Our fiscal deficit is also in double digits this year. For that matter, Japan, the United Kindgom, Ireland and Spain find themselves with similarly difficult fiscal positions.

Some of the biggest economies are going Greek, and the investment implications are important.

For now, it looks like the global economy is recovering. This will likely provide a temporary respite from these fiscal problems. But, eventually, the piper will need to be paid.

When that happens, it might be nice to be far from government bonds and have some downside protection in place. When the world goes Greek, it won’t simply “disturb” markets.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.