More thoughts on Greece

By Jani Ziedins | Intraday Analysis

May 13

The problem in the Eurozone is there is no way Greece, and others, can make good on their debts and European leaders are simply figuring out how Greece, and others, are getting off the hook.

  • The simplest and most straight forward is for Greece to give its creditors the middle finger. That is how most deadbeats handle it, so what is the big deal? But economic experts are petrified of the consequences for the stiffed creditors as they become insolvent without Greece’s repayment and that will kick off a series of dominoes leading to a global depression. That sounds ugly and is why smart people are desperately looking for an alternative.
  • One option is having a rich benefactor swoop in and pay off all their debts. But since no one has enough money outright, they’ll simply print it and hand it to the creditors. This lead to inflation, but that is tomorrow’s problem. But the political ramifications for this option is it appears like Greece is getting a free pass as they are bailed out by all the other hard working Europeans, making this a politically challenging option.
  • An alternative is letting Greece default, but then bailing out the banks that are on the verge of collapse, heading off financial contagion and global depression. Again more money printing and the only difference between this one and the previous is whether or not Greece defaulted, but in reality, this is purely semantics because the effects of money printing will be the exact same for the Euro-zone economies. But it might be slightly more palatable to Euro citizens because it doesn’t give Greece a free-pass. But at the same time it turns into bailing out fat-cat bankers who are even less liked.
  • The most extreme of the options is to shred and rewrite every single contract in Greece or pertaining to Greece as they drop out of the Euro and re-adopt the Drachma. The advantage is it give Greece the independence needed to print as much money as they need to pay off their debts. But this will be sheer contract-law chaos as everyone fights over what debts and assets stay Euros and which are converted to near worthless Drachmas. Dose Greece have authority over European creditors to force them to take Drachmas for their citizens debt, or can the foreign creditors insist on repayment in Euros? What about Greeks who have money in foreign banks? And of course the problem of financial contagion and bailout remains as creditors who are repaid with worthless Drachmas will still face insolvency as they are unable to repay their creditors with a worthless currency they received as payment.

The last item barely hints at what a monumental challenge breaking up the Euro will be because it affects every single contract written in Europe. Even separating a single nation will be a huge, tangled mess and lawyers will feed generations of their heirs with all the money they make over litigation of these existing contracts. And it doesn’t even address the financial solvency problem since Greece will still be defaulting in spirit by paying off their debt in a worthless currency.

But no matter what poison you chose, default, money printing, or breakup, the ultimate goal is to avoid paying the debt incurred either through an outright refusal to pay or some kind of inflationary devaluation where the value paid back is worth far less than the value borrowed. But the thing to realize is no matter what route is taken, the end result will always end up with the tax payers bearing the brunt of their politicians fiscal recklessness. So if all three roads lead to the exact same place, why not take the easiest one and just get it done with? And no doubt this is what will happen once the rubber hits the road and the time for action has eclipsed political posturing.

No doubt I didn’t do a great job of explaining the above logic, but the fact remains that it is next to impossible to un-bake the Euro and for better or worse that continent is stuck with it. But hard lessons were learned and going forward there will be more fiscal unity in addition to the monetary unity and we’ll see more centralized fiscal and monetary policy like we see here in the US as a collection of states under a fairly powerful central govt.


About the Author

Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He has an undergraduate engineering degree from the Colorado School of Mines and two graduate business degrees from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two children.