06/28/11 London, England – Most of investors’ attention has been fixed on the Eurozone. Europeans wring their hands or curl their lips. They are worried. They are mad. And they don’t know what to make of the situation.
French bankers came up with a plan – much like the Brady bonds of Latin American debt fame. The idea is simply to roll over Greek debt, voluntarily, to 30 years. This is a default…but it’s a graceful default. Lenders lose money – they don’t get their money as promised. But they can still hold their heads up; they’ll get it later. If everything goes well.
Investors seemed to be betting on it yesterday. Stocks and bonds rose.
Trouble is, things are not likely to go well. There is no plausible growth rate that will make it possible for the Greeks to ‘grow their way out’ of this debt. All they can do is default, one way or another.
Americans who take the trouble to look across the Atlantic gloat. They knew the euro would never work out. And now, even Europeans themselves are saying so.
Our old friend John Mauldin, for example, recorded French economist Charles Gave as follows:
Now, for those who have never had the extreme pleasure of time with Charles, he is a powerful, white-haired French patrician, and one of the better economists I know. Quite a brilliant thinker and not afraid to express his mind forcefully with a voice that sounds like God talking, with about the same assurance (note to self: never again follow Charles on a speaking stage).
“The question is entirely irrelevant” – punctuating the air for added emphasis. “The euro will not exist in a year. The whole thing was dysfunctional from the beginning.”
Gave has a habit of coming up with clever, well-argued ideas. Some are even good ideas. But we would not rush to dump our euros. The dysfunctional nature of European central planning is a blessing; the Europeans aren’t nearly as good at undermining their currency as Americans.
Along the southern and western periphery of Europe, people are wondering what will happen next. This week, the Greeks are scheduled to vote on a 5-year austerity plan. If they vote against it, maybe the French will reconsider. But the French banks aren’t the only ones holding Greek debt. It’s all over the financial world. Sooner or later, it will have to be reckoned with.
Further to the west, Italians are getting ready to vote too. They run deficits and are faced with the threat of bankruptcy too. In minutes, fearful investors could push up the price of borrowing beyond their reach. They need to soothe the marketplace by beginning to cut spending now. On Thursday, Berlusconi’s cabinet is expected to approve $40 billion of cuts.
Keep following the sun, and the story gets worse. In Spain, Portugal, and Ireland “austerity,” cutbacks and threats of bankruptcy are in today’s headlines.
But wait. We didn’t have to come to Europe to read headlines like that. The LA Dodgers filed for bankruptcy yesterday.
And what about the Golden State? Or Illinois? Or New York? If these were separate countries, their finances would be no better than that of Europe’s southern tier. Add their share of the US central government debt, and their share of unfunded pension and health programs, to their already bulging state and local debt and what do you have? That’s right, Greece!
In terms of debt to GDP, many of America’s states are as heavily burdened as Europe’s limping, battered debt-plagued countries. The difference is, in America the central government shoulders the largest portion of the debt.
So, in Europe, a few marginal nations head for bankruptcy. In America, the whole shebang is going broke.
Bill Bonner
for The Daily Reckoning
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
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The WSJ had an article today on the editorial page that seemed to say half of all USA money markets cash is invested in European banks? The author said the Money Market folks were betting that the US government would step in if it looked like the Money Markets would break $1.00. If I read that article right it would be enough to bring me over to Bonner’s take on things. Maybe we are truly leaderless. This is coming from someone who has spent half his life in government. Just maybe there is no pilot running the plane. I can’t tell what is going on I am surrounded by so many layers of bureaucrats but just maybe there really is no one at the top that has any sort of clue what is going on. Maybe I need to get some more silver and spend more time at the range. My gosh I am becoming a Bonnerite!
We’re broke alright and we know it! We just haven’t come up with a good way of breaking the news.
Next month, July. We should start seeing the Nippon effect…
@Parr,
There are worst things in life than being a Bonnerite. You could become a Bernaneke-an. :shudder:
I suspect the real problem in Greece is quite simple; -tax evasion. On a massive scale, so large that the economy itself appears much smaller than it really is. I also suspect, many of the rioters in streets there are quite aware of this. In their minds, if only the rich would pay their fair share, all would be well in Greece. All sorts of gibberish can be written about debt, about realitive GDP, etc etc, –but in the abscence of a crack-down on corruption (which is what tax evasion really is) austerity measures in Greece are likly to send the entire country up in a ball of flames. And this, I suspect, is a preview of what will be happening here in the US in the not too distant future. Historians a century forth, will look back on the protest at the U2 concert last weekend comparing it to the man in Tunisia who set himself alaze over a business permit thereby setting off revolution across the entire middle-east.
It is sad but the old story continues – more credit and guarantees in exchange for further conditions. If this trend is not stopped I am afraid the crisis will only escalate and the EU will make it more probable that some donor countries finally withdraw from these rescue packages in the months to come.