“The answer is quite categorically not.”
Source: Bloomberg News
Greece comprises only 3.8% of European Union GDP, yet, the amount of attention spent by eurocrats, economist, journalists, and the general public on how the Greek crisis is unfolding is disproportionately high. Some journalists compared the attention to how ludicrous it would be if President Obama were dedicating the majority of his time to resolving economic issues in Alabama. However, how Greece is handled today, in my view, sets a precedent not only for the future of the European Union, but also for the $200-trillion debt-laden world where many more countries are likely to find themselves in the shoes of Greece. So the IMF , the European Central Bank and the European political leaders including the Greek government have the difficult task of creating a formula for re-igniting economic growth in a heavily indebted and economically-arthritic country. How they do that will be bench-marked in the future either as the botched Greek crisis or an economic and political miracle. If you look at the underlying facts it seems that nothing short of a miracle is required to salvage Greece and keep it in the monetary union:
The economic and political facts are at this point painfully clear:
- $360 billion and 160% of GDP in accumulated debt owed to the IMF, European Central Bank, Germany among others (see Chart 2 on Greek debt owned to foreign banks by country)
- A deadly downward spiral of economic decline. Compare that to the steady increase of nominal GDP of Germany (See Chart 1)
- A Greek government led by the increasingly unpalatable Tspiras elected on an anti-austerity platform.
- Disillusioned citizens, who voted “no”, symbolically, in the recent referendum to austerity.
- High levels of unemployment especially among the young (54.2% for youths 15 – 24 years of age) leading to frustration and potentially social unrest (See Chart 3)
Chart 1: Relative Greece Dept/GDP and Nominal GDP
It is also undeniable that Greece, suffers from a high level of inefficiency and unsustainable social benefit structure including an incredibly generous retirement policy which for example, far exceeds the retirement benefits that the more productive Germans receive, a huge and inefficient government sector, abysmally low level of tax collection in a predominantly small business economy, and phantom government-owned enterprises which according to the European creditors should be privatized and according the Tsirpas’ government do not exist.
The famed conservative British leader, Margaret Thatcher memorably remarked: “The problem with socialism, is that eventually one runs out of other people’s money to spend.” The Iron Lady might as well have been commenting on Greece. Even with deep pocket creditors such as Germany and IMF, Greece is finally running out of other people’s money to spend which was an unavoidable reckoning.
Chart 2: Greek Dept by Country
Source: CNN Money
However, while it is easy to criticize the Greeks for refusing to get on with the program and implement the tough-love measures requested by the creditors, I would like to focus on the less discussed topic of why the suggested austerity policy is highly unlikely to fundamentally address the problems in Greece.
Firstly, what Greece ultimately needs is a restart of its economic engine through investment and innovation. No country to date has been able to achieve economic growth purely through austerity. No country to date has been able to pay 160% of GDP back to its creditors without significantdebt forgiveness and I do not mean the grudgingly proposed “haircuts” or indefinitely elongated payment schedules. The most effective economic recoveries required high levels of capital infusion to jump-start the economic engine – most notably, the post-World War II Marshal Plan; post-Great Depression Keynesian-economics inspired government spending; and the most recent post 2009 mortgage crisis, when the Fed flooded the US economy with liquidity through government bond repurchases. Austerity is a dubious measure that creditors, such as the IMF like to enforce on poor and politically weak countries aiming to get their money back faster. Unfortunately, austerity creates zombie economies which may have low debt, but unfortunately also end up with low prosperity. Bulgaria, for example is a country that Madam Merkel praised as ”disciplined” with very little government debt that has been able to implement austerity policies effectively. Yet, Bulgaria has the lowest GDP per capita in the EU and remains one of the poorest economies in Europe with little prospects for growth.
It is not surprising then that Greece refuses to play ball. The restructuring discussion would have been far more appealing to the Greeks and far more believable if more emphasis was paid to creative ideas of how to jump start the Greek economy. Young and unemployed (see Chart 3 below), the Greeks are not willing to hear about austerity, but would love to hear about how to get a job. At the latest GAIM Conference in Monaco, I participated in a simulation of the Greek crisis. Some of my colleagues suggested interesting ideas focused on Greek economic growth ranging from a Russian natural gas pipeline going through Greece, to Germany relocating manufacturing to Greece and Greeks providing cheap labor, to a free economic zone in the Mediterranean with an infusion of Chinese capital. While each idea may or may not be viable, what was more striking to me is that rarely if ever in the real Greek economic and political debate, do I hear much about stimulating growth and productivity.
Chart 3: Greek Unemployment Rate by Age
Secondly, in addition to economic growth, an innovative approach to debt restructuring is needed not only for Greece but also as a precedent for the world. The global debt including government, corporate and household debt, currently stands at $200 trillion with $57 trillion added since 2007. Current debt levels are likely unsustainable and unlikely to be repaid not just in Greece. A combination of currency devaluation, significant debt forgiveness and creation of new debt instruments that act more like equity and link to GDP growth, for example, will better align incentives between the creditors and the borrowers and ultimately could lead to faster economic recoveries.
Referring to the Greek plan or lack there off, Ian Bremmer, president of Eurasia Group, a political-risk consulting firm said: “It’s clearly a Band-Aid solution. I’d love to say we’ll be back here in a year or two. It’s more likely to be a few months.” I could not agree more with Mr. Bremmer. Much more is needed than bridge loans and austerity.
Impact on Markets:
While hard to predict how exactly the Greek drama will play out, there are some meaningful impacts on markets, which I translate in the following market bets:
Long dollar: The dollar remains the relative currency of strength at this point with uncertainty in Greece and underlying questions about the sustainability of Chinese growth and questions around a Chinese bubble.
Short euro: Significant QE is already underway but even greater liquidity will be required to get Greece on its feet and to fund necessary tax raises in the euro zone to pay for defaulted debt.
Short European Equities: While I expected a boost in European equities short term due to QE, I still questions the long term sustainability of European economic growth without significant structural reforms including change in labor laws and retirement age in Greece and beyond – France, Italy, Spain. Additionally, whether Greece defaults or remains in the Union would require significant write offs by its debt holders. Taxpayers from other eurozone countries would take the hit. Most of Greece’s government debt is held by other eurozone countries further negatively impacting European markets.
Neutral to Short Greek Bonds: Some of my colleagues believe that Greek government bonds have been oversold and are a buying opportunity. However, I prefer to stay away from these as the various interim solutions that are being suggested including the latest 7.6 billion- euro ($8.3 billion) bridge loan which will reach Greece on time by Monday, do not provide a sustainable solution.
Note: I am conducting research on trends and opportunities for disruption in asset management (www.disruptinvesting.com). If you have insight into the topic, feel free to contact me.
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