Beware Of Greeks Bearing Grudges And Debt

by: Robert Brusca

So it looks like the Greeks have a domestic agreement on a debt deal that touches all the bases required by international lenders (The Troika). Is that good news? I know what you are thinking, 'What a stupid question right?' Stock markets are rising the euro seems to like it, how could it be bad?

Well, maybe 'bad' is too strong a label, but is it 'good', really? And 'good' for what, for whom?

The plan for Greece has some elements that are both good and bad depending on which side of the fence you stand and it is worth exploring these relativities.

First of all, it's hard to like this austerity plan in the middle of a recession unless you are a diet doctor who uses anorexia as a weight-loss tool. Imposing austerity on Greece right now is a real fool's errand. Or, to put it in another context, is not just pain and punishment but it smacks of rubbing it in. It's an excessive remedy

The Europeans have had it with Greek promises that appear like events in the movie Groundhog's day, like pledges that are made over and over but nothing ever changes. And it's hard to cut Greece any slack on these points. Even the Greek arguments that economy deteriorated so they could not follow though makes no sense because they surely could still have pursued tax cheats harder, especially since they did not launch big government layoffs.

So now things are even worse and Greece has to make the same promises - how will this turn out? Groundhog Day II? Recall that the movie did not have a sequel because, in a sense, it already was its own sequel.

In short, the problem in Europe is still that Greece and the Troika have no trust. And even as Greece's economy is in a worse state than it was when Greece last made many of these same promises, and now it will make them again. Really, if it weren't so serious I'd have to laugh.

It has been said that Greece had to get this deal and that this was not a time that Greece could go it alone, so the unanswered question is not will Greece gets its money or will the bond swap go ahead but after these things happen, will Greece continue to follow though…or not?

The question of knock-on effects may be even more pressing if Greece takes the medicine and sticks with the plan because wouldn't Portugal want some of the same relief… and Spain… and so on? We are here only dealing with Greece. But Greece is more a symbol of a problem than it is the real problem.

Also, look at the debt plan - what is it geared to do? The Greek debt plan is plan is constructed to make sure that once the banks take their losses the Greeks will pay their remaining bills. There is nothing to make Greece more competitive. There is a 20% wage cut that is still an order of magnitude too small and it is not clear how widespread this 20% pay reduction will turn out to be. The two extra annual bonus payments to workers are not being touched.

Greece is being forced to undergo some pain because the bankers have undergone pain and that is how banks do things. For example, a banker's idea of forbearance on a loan is taking the payments you missed and 'forgiving their being missed' by adding them to the principle owed along with any accumulated interest that was due. When you owe a banker money, you must stick to the terms of the contract.

There, are of course, exceptions; most arise out of bankruptcy. There are bundles of examples of sovereign borrowers who got in trouble and, with debt over their heads, found ways to have it cut back as Greece is doing. Greece is getting the kind of treatment that only sovereign borrowers get. And interestingly while bankers are always concerned about 'moral hazard', bankers themselves keep making the same mistakes and continue to blunder into over-lending schemes again and again.

Rather than looking at Greece, we need to look at bankers to try to understand why they can over lend again and again and still survive. Actually, the answer is not so mystical. They have loan loss reserves; they can write off losses against other revenue. Bankers seek to control losses, not to eliminate them. Losses are part of their business. Bankers also get governments and central banks behind them when the debt situation is big. This is another aspect of too big to fail although this variant is more nationalistic since no country wants to see its banks collapse because of excess losses on dead-beat sovereign debt. So bankers also are a sort of 'flag carrier' for their country and they get some special protections because of it.

The Greek deal will still leave Greece burdened by debt. There will be painful cutting of the government and of wages in some places. But nothing is being done to affect the economy wide loss in competiveness that occurred since Greece joined the e-zone and lost 30% in price competitiveness to Germany. There are no infusions of funds to rebuild or to modernize (or to launch) any Greek industry. In this way Greece's road is much more difficult than that of East Germany which West Germany helped to pull up and to re-acquaint it with any common German values that may have eroded while East Germany was on the rusty side of the iron curtain. For Greece it will be worse. It has no sugar-daddy.

Markets can rally. Politicians can crow, and children can play in the street. But nothing will make me embrace this action. I am not even sure it will keep Greece from defaulting except in the very short run. In the end, as was the case for Germany at after WWI, when the burden of payments is too severe, the process will grind to a halt. There are some things you just cannot expect a nation to do - even if it agrees. I am not convinced that Euro-austerity plan for Greece, spearheaded by Germany of all nations, does not go over that line. So what if all the Greek major political parties agreed to it. What else could they do?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.