At the end of April I wrote a post titled “Going, Going, Gone? How Low Can Confidence In Greek Debt Get?” in which I suggested – in a humorous but mean-spirited way – that an announcement by Zippy and George (two childrens TV puppets from the UK) might be enough to bring Greece to it’s financial knees.
Well, it looks like the felt puppets have spoken!
The BBC discusses the rumour of Greece leaving the euro.
If you are a policy maker at government or European level involved in the euro, I would suggest that you drop everything and start giving this your number one priority. I’m sure there are some EU policy wonks in a think tank out there somewhere giving this some real thought, but it has been the topic that nobody dares to mention. Much like not mentioning Voldermort in the Harry Potter books, you don’t want to bring it to life.
Now that the mainstream media is on this, Greece is coming out of the eurozone. It won’t be if or perhaps, it will happen – it is just a matter of when. And, of course, it is also a matter of how much it costs and who pays.
Structural Problems In Greece
Back in October 2010, famed financial author Michael Lewis wrote this very long investigative article about the Greek economy for Vanity Fair. (Don’t knock it, some of the best financial investigative journalism on the planet happens each month in Vanity Fair.)
In the article, Lewis looks at some of the real structural problems in Greece. Topics that need to be addressed probably are not being addressed quite well enough in Athens. He looks into things like, retirement ages and rampant tax evasion. And there have also been the revelations involving Greece, a very large US investment bank and off balance sheet accounting.
Greece has been living beyond it’s financial means for a very long time and now it is time to pay the money back.
Greece Is In Play Again
Now that Greece is back “in play” there are going to be huge waves of “hot” money from hedge funds around the world betting against it. These guys, though we may all hiss and boo at the mention of hedge fund managers, are much more financially savvy than the Greek financiers and have much more money to play with. They will win. I am sure of it.
As we saw with the delays by Angela Merkel about making a decision as to whether or not to help Greece, the delay cost a lot of money and made things quite tricky politically for other Member States for several weeks. Delay will be expensive again. The EU needs to be sure that the previous lessons have been learnt.
The more problems are denied at a political level (in the hope that they go away) and the longer firm decisions take to make, the more money will be sucked from the European economy and people (in the form of long-term debt obligations at higher interest rates) into the pockets of the hedge fund managers.
This is a zero sum game in which the population of Europe could lose very heavily.
What Are The Macro Issues?
Some of the big topics that will need to be addressed will be very macro indeed. This will not be about ‘saving’ the Greek economy, that has already been lost I fear. If it takes Greece 3 or 5 or 10 years to overcome this, what will be will be.
The real fear for everybody should be that the financial system is still in very poor health, liquidity is still not great, balance sheets (national, corporate and personal) are overloaded with debt and Europe is not able to fund more firefighting. Will this bring down the euro? Could this bring down other countries that the euro cannot try and save a la Greece, Ireland and Portugal? How will the German economy ride this out?
I really hope things will be ok.
But the reality is that the European and global financial system is so fragile in so many ways that this will be a real body blow.
Is There A Saviour Waiting In The Wings?
What if a financial saviour flew in from afar, arms loaded with cash and ready to bail out a troubled economy? It sounds ideal, correct?
What if that caped superhero was China?
For those that really follow finance, there are many examples of sovereign wealth funds swooping in, providing liquidity, buying up assets, and then expecting a say in how things are done. As we say in finance: He who has the gold makes the rules.
The prospect of a far-away global power buying their way into the affections of an EU Member State and exerting ‘soft power’ over the way decisions are made at national and EU level is not all that far fetched.
Such geo-political hardball ought to be the really scary part of these developments, and I would personally argue, the area that EU policy makers really need to guard against.financialguy