I haven’t chimed in with my two cents on Greece yet but I figured you might be wondering what I think, and more importantly, how it might affect investment markets. It’s no secret that I’ve been pretty critical of the Eurozone the past few years. A monetary union without a fiscal union just cannot work – it’s that simple.
Greece should have left the Eurozone a while ago and now it looks like we’re on the verge of that happening. It’s the only solution for them. If Germany won’t agree to a restructuring of the debt with haircuts, and they’ve made it very clear that they have no interest in that (only austerity), then Greece must leave the Eurozone, return to the Drachma and repay the debt with a devalued currency. This isn’t a new story; it’s exactly how it’s played out literally hundreds of times before across the world for the past 300+ years. I have to admit that I was surprised to see the “No” vote pass in last Sunday’s referendum though. The EU has blocked or rigged every other election to secede from the EU/Eurozone (Scotland, Catalan region of Spain, etc.) and forced out every leader that opposes Brussels (Italy’s Berlusconi). I didn’t think the EU was going to let Greece leave simply because Greece is a NATO member and controls the ports on the Mediterranean that essentially protect Western Europe from Russia and the other old Soviet states entering by sea. The US is urging the EU and Eurozone to clean up this mess for the sake of NATO but Europe doesn’t seem to care.
I’m not sure who is the bigger fool – Greece for decades of fiscal mismanagement or Germany for force-feeding their lending to Greece when they’ve known for years that it would never be repaid in full? Most people I talk to blame the Greeks for their “laziness,” corruption and ridiculous pension system. All valid points but it’s well known now that they manipulated their finances to be allowed into the Eurozone. They were allowed in because the EU leaders want everyone in. They have this dream of trying to unite Europe into a “United States of Europe” like the USA where they control everything. The Southern nations of Europe are all in a very similar situation at this point because they were used economically by Germany leading to years of imbalances. One country can’t run surpluses without others running deficits; all have to balance to zero. It’s clear that Germany is on a mission to destroy Greece economically to make an example of them so the other nations in trouble don’t fight back against austerity demands as well. Guess what Germany, you can’t have your cake and eat it too.
The whole experiment of the Eurozone has been ridiculous. The EU began in the late 1950’s as a way to unite Europe after starting two devastating World Wars. Unfortunately they’re discovering once again that you cannot impose one country’s cultural biases on another without some serious backlash. My fear over the coming years is that the Eurozone continues to tear apart in a nasty fashion because politicians can never admit that they were wrong. If you’re interested in a great book on Europe, I recommend reading Flashpoints: The Emerging Crisis in Europe, by George Friedman. I read it earlier this summer and it offers some great context on the history of Europe and clash of its different cultures all squeezed into a very small space.
So what does this means for the markets? To be honest, no one knows because we don’t know how everything will play out, to what extent Greece might “default,” and what kind of follow-through effects a Grexit would have on the Eurozone as a whole. If they do default, I think it will cause far more serious ramifications than most others. As we learned in 2008, the global financial system is highly intertwined and Europe even more so. Europe has spent the past few years recapitalizing their banking system to get the bad assets off the books and shift them to government institutions. At this point, most of the Greek government debt is held by the troika which are supported and funded by nations themselves (i.e. taxpayers). To the extent that a default would cause any of these institutions to raise capital, European nations may have to issue additional debt which would lead to an increase in rates (drop in bonds).
As for stocks, I think a fallout would cause some severe volatility in the short-term, simply because the day-to-day movements of stock markets these days are driven almost solely by over-leveraged hedge funds and computerized-algos. There’s also the possibility that some funds were making big bets on Greece receiving additional bailouts, which doesn’t seem to be the case now. If they go bust, it will raise the question of counterparty risk. I’ve been very slow to step in and buy stocks so far. I’ve added to a few but I still have the feeling that we’ll see a large flush out – that’s when I’ll do most of our buying.
I’ll leave you with a few questions to think about: What do Greece, Puerto Rico, Detroit, Illinois and many, many others have in common? Why have interest rates gone from 18% in the early 1980’s to 0% today? Why is every Western government on a mad hunt to collect taxes? Why has the velocity of money collapsed over the past decade? It’s not hard to connect the dots.
-Nick