Investors should prepare for Greece to leave the Eurozone—not a disaster but likely to cause significant volatility, especially for U.S. and European financial stocks. George Soros, who has made billions betting on currency market ructions, believes there is a 50% chance of a Grexit. Even if Grexit does not occur there will be a lot of nail-biting brinkmanship causing markets to behave as though there is a very high probability it will happen.
The problem is that Greeks love socialism but hate to pay their taxes, which is not a sustainable business model. Greece snuck into the Eurozone the old-fashioned way—by lying and cheating and misrepresenting the size of its budget deficit. Then it dug a bigger financial hole for itself by borrowing on Germany’s balance sheet until the financial crisis. It did in fact tighten its belt after the crisis and reined in the primary budget deficit, but the necessary “structural reforms”—including stricter tax enforcement—were never made.
Then the country voted in a socialist government whose leaders (especially the oh-so-cool Finance Minister in his black leather jacket) have managed to alienate their peers across Europe. But far worse than the bad optics and hard feelings are the hardline socialist policies of the new government, which pretty much guarantee the Greek economy will stall and fail to generate the necessary tax revenue. Consider an article in the Financial Times titled “Athens digs in over golden opportunity.” It seems that Eldorado Gold, a Canadian mining company, was “making steady progress” toward opening a Euro 1 billion mine, but it has been “stymied” by Panayotis Lafazanis, the new minister for a department with the improbable name “Productive Recovery, Energy, and the Environment.” According to the FT, Mr. Lafazanis has “focused on reversing earlier pro-market policies agreed between Greece and its international lenders, hampering Athens’ attempts to unlock urgently needed bailout money. He has cancelled the planned privatization of state-controlled electricity assets….” This gentleman is not a big fan of private enterprise; he “maintains that private companies should be excluded from developing the country’s natural resources.”
So this simply is not a government the Euro-crats can play ball with. It has neither the will nor even the ability to accomplish the things that need to be done to stay in the Eurozone. Not surprisingly, investors are voting with their feet, transferring their Euros out of Greek banks before they turn into drachmas. It is hard to engineer the economic turnaround of a nation when the balance sheets of its banks are shrinking.
It’s Not All About Germany and Greece
Some commentators believe super-Angela will “find a way” to avoid a Grexit but—despite the nasty high-profile sniping between the Greeks and Germans–it is not up to the Germans alone whether Greece stays or goes. In sparring with the Greek government, some of the toughest negotiators have been the Spaniards. Spain, Portugal and Ireland did in fact make the “tough structural reforms” that Greece failed to make; they inflicted great pain on their citizens in the process, and unemployment is still sky-high. Extreme political parties pose a serious threat to the incumbent leaders in these countries; they fear that voters will revolt if Greece gets yet another bailout that allows it to avoid the reforms endured by other European countries.
Another reason why Grexit is likely is that at this point, with most Greek debts owned by “official” creditors such as the IMF rather than European banks, it would not be a disaster for Europe—just for Greece. Stay tuned, and keep some cash available, to put to work during periods of “volatility.”
Copyright Thomas Doerflinger 2015. All Rights Reserved.
