Eric Fry

Greece returned to Europe’s center stage this morning…and almost no one was happy about it. Most investors were pretty content when this “Debbie Downer-opoulos” of the European financial markets disappeared behind the curtains for a while.

But Debbie took the stage again Sunday when the left-wing Syriza party gained a surprisingly large number of seats in Parliament. The leftists hope to form a coalition government that would nationalize banks, repeal recent labor reforms and immediately cancel the bailout accords with the European Union and the IMF.

In other words, these politicians are threatening to undo the very austerity measures that the EU and the IMF adore. Whether or not such “leftist reforms” would benefit Greece, the idea that the Greeks would unhinge their EU shackles is worrying investors.

The major European stock markets dropped about 2% — pushing several stock indices on Europe’s periphery deeper into the red for the year. The Spanish, Italian, Portuguese and Greek stocks markets are all showing losses for 2012. Looking back over the last 12 months, all four of these markets have tumbled at least 33% in dollar terms.

For a fleeting moment earlier this year, many investors placed the Eurozone crisis in the past tense. But now it appears that the crisis is very much in the present and future tense. “Euro Near Three-Month Low on Greek Leadership Concern,” a Bloomberg News headline declares. “Alexis Tsipras, whose Syriza party placed second in Greek elections on May 6…said he wouldn’t agree to join forces with New Democracy and Pasok, the two Greek parties that have supported austerity measures in return for international funds.”

“When you have the guy who’s supposed to form the coalition saying that there’s a moratorium on debt limits,” a currency strategist tells Bloomberg, “that the bailout is not necessarily in place — stuff like that is getting people a little skittish,”

Indeed…and the skittishness is rippling across the Atlantic. Here in the US, the “risk-off” trade is back on. Stocks and commodities down; bonds and the dollar up. Although the major US stock indices are still clinging to gains for 2012, the S&P 500 is off about 4% since early April.

These modest signs of investor distress will no doubt inspire renewed bailout/austerity/manipulation efforts by the European and US governments’ financial meddlers. As we have observed time-after-time since the 2008 crisis, there is no economic downtick that is not simultaneously a call to action — a call to government action.

Regrettably, most of these government actions address symptoms rather than the disease itself. They “cure” gangrenous limbs with Lidocaine rather than amputations. As a result, a smattering of politically connected banks and corporations feel better, but the overall economy remains deathly ill.

The European interventions of the last two years tell the tale. Northern European taxpayers have sent hundreds of billions of euros to their southern neighbors, while the European Central Bank has printed more than €1 trillion and funneled most of that money to large European banks. As a result of all of these shenanigans, many large European banks feel much better. But millions of taxpayers are poorer… and the Greeks themselves are no better off.

In 2010, before the first bailout, the Greek government owed about €310 billion, all of it to banks and other members of the private sector. Today, a whopping 73 percent of Greek debt sits on the books of the European Central Bank, euro-area governments and the IMF. And by the time the EU and the IMF finish sending their bailout euros to Greece in 2015, Greek debt will total about €316 billion, close to 100% of which will be held by the ECB and other government agencies.

In other words, the Greek’s monstrous government debt load would be just as large in 2015 as it was in 2010. But government agencies would be on the hook for those debts instead of European banks and other private investors.

Is this really a remedy? If so, for whom?

This sort of remedy rewards imprudent banks, punishes taxpayers and condemns the Greeks to years of indentured servitude. And it probably condemns the entire European economy to a sustained period of slow-to-negative growth.

Unfortunately, while such governmental “do-gooding” almost always fails to restore health and viability to a sickly economy, it almost always succeeds in nourishing a lot of “do-badding.” By rewarding imprudence — over and over — government-sponsored bailouts encourage bad behavior…over and over.

Eric Fry
for The Daily Reckoning

Eric Fry

Eric J. Fry, Agora Financial's Editorial Director, has been a specialist in international equities for nearly two decades. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short-selling.  Following his successes in professional money management, Mr. Fry joined the Wall Street-based publishing operations of James Grant, editor of the prestigious Grant's Interest Rate Observer. Working alongside Grant, Mr. Fry produced Grant's International and Apogee Research, institutional research products dedicated to international investment opportunities and short selling. 

Mr. Fry subsequently joined Agora Inc., as Editorial Director. In this role, Mr. Fry  supervises the editorial and research processes of numerous investment letters and services. Mr. Fry also publishes investment insights and commentary under his own byline as Editor of The Daily Reckoning. Mr. Fry authored the first comprehensive guide to investing internationally with American Depository Receipts.  His views and investment insights have appeared in numerous publications including Time, Barron's, Wall Street Journal, International Herald Tribune, Business Week, USA Today, Los Angeles Times and Money.

  • gman

    “As a result, a smattering of politically connected banks and corporations feel better, but the overall economy remains deathly ill.”

    of course. that’s the point.

    “But government agencies would be on the hook for those debts instead of European banks and other private investors.

    Is this really a remedy? If so, for whom?”

    the banks and private investors, that’s who. capitalism in action, the infestor’s ideal situation, guaranteed income. what’s not to like?

  • Bennet Cecil

    Greece needs to default and return to their own currency. When a room in Athens rents for $50 per night tourism will boom and Greece can recover. Sooner is better than later. Let the banks and the Euro fall.

  • gman

    “This sort of remedy rewards imprudent banks, punishes taxpayers and condemns the Greeks to years of indentured servitude.”

    and your point is?

    the banks were not imprudent. they are banks. the taxpayers are not being punished. they are being taxed. and the greeks are not being condemned. they are being harnessed. that’s the point.

  • Woody in Florida

    Yeah gman….let them eat cake!

  • Rusty Fish

    Ultimately, if they don’t keep printing what are they going to do? With this chilling economic weather!

  • gman

    “Ultimately, if they don’t keep printing what are they going to do?”

    the purpose of fiat currency is to transfer wealth from those who make it to the bankers. the more the bankers print, the more they are “owed”. the less they print, the less they are “owed”. therefore they will not allow “deflation”, as that is default. they will print. the printing will continue until it becomes impossible for anyone to use the currency. at that point theoretically the bankers will “own” absolutely everything.

    the only question is when will the currency become impossible to use. during weimar and zimbabwe currency was physical and it was difficult to push a wheelbarrow full of cash to buy a loaf of bread. but now currency is electronic and one may carry $100,000,000,000,000,000,000,000,000 on a piece of plastic and allocate it across the world at the speed of light. it will be interesting to see how high they can ponzi the pyramid.

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