A Note on the Sovereign Debt Crisis: Abandon Ship!
The Dow fell 59 points yesterday.
It looks to us as though the stock market is finally rolling over…it’s finally putting in a big top after a long, long bounce. But it could be just another temporary setback. We won’t know for a while. In the meantime, readers are advised to floss their teeth and stay out of stocks. The bounce may or may not be over. It hardly matters. There’s not much upside at these prices…and a lot of downside.
Flossing helps protect your teeth. Staying out of stocks might help protect your money. There are too many sticky things that could go wrong.
For example:
“Eurozone debt fears deepen,” says the front page of yesterday’s Financial Times.
According to the papers, the Greeks have spooked the world’s stock markets. “The sell-off in global markets accelerated [Tuesday] amid fears that the eurozone debt crisis would worsen and that China’s recovery was faltering.”
As to the Greek bailout, there are two points of view – both of them insufficient. One group thinks the bankers should get their money. The other thinks the public employees should get the money. ‘Stiff them both’ is our advice.
A nation is like a ship. Over time – especially when the weather is nice – it accumulates barnacles. They attach themselves to the hull, weigh it down, and slow the boat.
Barnacles need to be scrapped off from time to time. That’s what revolutions and corrections are for. But, naturally, the barnacles don’t like it. They live on pensions, public sector jobs, handouts, government contracts – and debt. And the barnacles have a way of fighting back. They vote, threaten and demonstrate. Yesterday, government employees shut down schools, airports and hospitals. Gray-haired retirees took to the streets, too, trying to prevent pension cuts.
The bankers made their threats too – quietly warning France and Germany that if the Greeks didn’t pay, their banks could be in trouble…which could lead to a financial meltdown all over Europe.
The rescue plan calls for deep cuts in public spending – 20% of the Greek government budget. And that means scraping a lot of crusty parasites off the hull. So much the better, as far as we’re concerned. Of course, some of them do useful work. Government payrolls include teachers, nurses and firemen. But there are plenty of do-gooders, bureaucrats, meddlers, paper-pushers, lobbyists, chiselers and layabouts on the payroll too.
But what about the debt barnacles?
The bankers speculated on Greek debt. The debt went bad. Now, they should stand up, admit their mistake, and take their losses.
Advice to Greece: Haul the boat out of the water…fire one out of every five government workers, cut the budget by 20%, and default on your loans too.
Advice to the US: Follow the Greeks.
Advice to investors: Take a long vacation.
The “Euro-feds” have turned the sovereign debt market into a ‘price hiding’ mechanism. Not even Mr. Market knows what the stuff is worth. A couple months ago, he thought Greek bonds might be A-OK. Now he’s not so sure. Recently, Mr. Market has been turning over some other rocks…Portuguese debt…Spanish debt. He’s finding slimy critters and creepy crawlers under all of them.
But then, the Euro-feds stepped in. They said they’d bail out Greece.
Now what’s Greek debt worth? Nobody knows. Will the guarantors make good on their promises? Will the Greeks get their financial house in order? Will the IMF, Germany and France stand behind the Greeks even if they don’t bring their deficit down to 3% (currently 13%)? Nobody knows.
And then, the head of the European Central Bank pulled a Bernanke-style stunt to further confuse everyone. Jean-Claude Trichet announced that Greek bonds could still be used as collateral at the bank, even though the bonds do not meet their quality requirements.
So, let’s see…what are they worth now? This additional information from the feds is misleading. It suggests the bonds are good credits. And the bailout itself suggests that lenders have nothing to worry about – they’re going to be repaid.
Uh…we wouldn’t count on it.
David Rosenberg:
“Back to Greece – the fiscal future is really messy. Latest projections show that by 2013, public debt-to-GDP will approach 150%. Debt-service charges will absorb 9% of GDP and 25% of tax revenues will be siphoned to bondholders outside the country. Government spending is 50% of GDP and the civil service does not seem willing to accept even a freeze – not a cut – to wages, benefits, and pensions. It is not difficult to see the Euro-area going the way of the Latin Monetary Union a century ago.”
This is just another example of rolling up small debts into big ones. Mr. Market can’t tell who’s on the hook, exactly. So he doesn’t know where the ‘good’ debt ends and where the ‘bad’ debt begins.
One thing is pretty sure. Even with the bailout and the support from the ECB, the Greeks are still going to default. They have more debt than they can carry. The bailout just muddies the waters…postpones the inevitable…and makes the situation worse for almost everyone.
The proposed solution is just slow torture before the coup de grace. The debt grows…and becomes so large the Greek economy can’t support it. Plus, efforts to keep paying back the bankers (mostly French and German) severely damage the Greek economy.
It’s easy to see how. In very broad terms, the Greeks are going to have to go from fiscal party to a fiscal hangover without a good night’s sleep. That’s what happens when you suddenly stop borrowing and begin paying back. And that means a shrinking economy. Instead of borrowing 10% of GDP and adding to the economy, not only are you NOT borrowing, you’re also taking OUT 10% of GDP to pay the interest on the money you borrowed for the party. That’s a depression-size decrease in GDP…which cuts into tax revenues and makes the country’s finances even worse!
Does that mean the end of the euro? We don’t think so…more tomorrow…
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