Default - That Which Must Not Be Named

Includes: ERO, FXE, IEV
by: Glen Bradford

Say it with me now: Greece is in default. For some reason, default is a tramatizing concept to world governments. Debtors can't pay? No problem. Give them some money and let them give it back to you. Call it a bailout. Let the debtor repay you with more debt. Let's do anything to avoid the harsh reality that Greece is in default.

You want to know what sucks the most about Greece owing you money? It's not an asset, but a liability. If Greece owes you money, you actually owe it money. Not only doesn't Greece have to pay you, but you also have to pay it more money over time. Sadly, the rules of finance do not apply in this case. There is an old adage that goes something to the tune of, "If you owe the bank $1,000 and cannot pay, that is your problem. If you owe the bank $1 trillion and cannot pay, that is the bank's problem." Houston, we have a problem. This is now an exercise of how great of a duration of time you can extend and pretend.

Denial isn't a sustainable emotion

If it smells like a dog, walks like a dog, has the bark of a dog, has the DNA of a dog -- and you can't identify it as a dog -- you're qualified to be an official. This is a default. Let's start calling it that. Sure, this is not a friendly word, and it sure isn't a good feeling when a doctor has to tell his patient that he has cancer -- but let's at least admit that it is what it is and at this point in time there is no avoiding it, just postponing it. I say we are in default now. Greece has been in default for months. The sooner officials recognize this as a fact, the less worse things will be.

A Lesson on the limitations of capitalism
Capitalism has its limitations. People can make short term profits making unsustainable agreements. For some reason, the global powers that be think that they can expropriate all of the income-producing assets from Greece. That unfortunately does not work. That would be very similar to any global power in ages past trying to control another country from afar. It just doesn't work. You can only take so much from people before they start to fight back.

At that point, if you look at things from a sunk-cost, future ROI perspective, there isn't much incentive to try and seek additional damages trying to recover your "lost investment," which was really made due to an incorrect assessment on your part of the systemic risks involved.

Realize that your investment is a sunk cost. Realize that going forward, you are going to have to bail it out more than you will ever extract out of it in terms of real value. If you don't, you will surely experience the pain of financial loss. Greece debt is a liability on a forward basis -- go ahead and discount the realistic future cash flows, and you see that you're going to be continuously paying it money and you won't be getting anything in return.

So who really owes who?

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