If You Want to Be in Eurozone, There Are Rules ...

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Includes: ERO, SPY, VGK
by: Nemo Incognito

I can’t remember which movie it was, but at some point a character said something along the lines of:

The first thing you do when you rob a bank is kill someone. That way everyone knows you are serious.

I can’t think of more readily applicable advice to the IMF and Germany than this in the case of Greece. Apparently, most Greeks disapprove of the IMF terms currently on offer. I assume they would also disapprove of having their savings wiped out and their banking system collapse too, which is the only other option on offer here.

Fiscal austerity is by all accounts a painful process. Having to cut government spending in a recession and deliberately reduce wages and prices is a hard sell at the best of times, and has only really worked in countries where the population has a fresh and visceral memory of hyperinflation and default, like the Latin American states, which got their act together in the '90s (Brazil, Chile, Argentina for about 5 years).

The problem is that Greece isn’t the only country in Europe with this problem, and the more slack the Greeks get, the harder it is to sell tough medicine to Portugal, Ireland or even Spain.

As such, my advice here is that someone needs to take a bullet and pronto. It is hard to see the Greeks putting together the political will to stay out of trouble, and if Argentina is any guide, it's better to do it earlier than later in the event that a country’s currency peg becomes hopelessly misaligned. Some countries can be saved – Portugal, almost certainly Spain, and on the outside, Ireland. Greece can’t be saved. It’s high time the IMF and Germany made it very clear that if you want to be in the eurozone, there are rules.

Disclosure: No positions