What Comes After Greece

Includes: ERO, EU, FXB, UUP
by: Dana Blankenhorn

Tom Wolfe's “A Man in Full,” which was set in Atlanta, my home town, plays out against a loan work-out.

The protagonist goes from being an honored customer of his bank to a set of words unsuitable for a family website. By the end he's broken, left town, the business closed, but the bank has taken a hit, too.

That's how bankruptcy works. You either pay or you leave the game. True for the debtor, true for the bank.

It's the failure of this system to work that has caused the global financial mess. U.S. banks put bad mortgage debt and “insurance” on that debt onto the public's back, then began lecturing the public sector about its profligacy.

Now something similar is happening in Europe, this time with sovereign states. It's similar to what happened to America in the 1780s, and again in the 1830s. The nation absorbed the debt in the first instance, and went into a decade-long tailspin in the second instance, bailing itself out with a war against Mexico that brought us the gold of California.

There are some in Germany who want to end the whole federalism idea, let Greece go its own way, turn the euro back into a strong mark and pull up the drawbridge. But they are a minority. Most realize that, in some way, the federal experiment must continue.

But at the end of the day, there also needs to be a way toward bankruptcy for states that forget you have to pay back what you borrow, like Greece, or that practice tax evasion as a way of life, like Italy. Bankers need to take big losses, but the countries can't just walk away scot-free, either. That means they must live within their means starting now, and after they pay their bills in cash for several years we'll talk about it.

What's going on in Greece (and to a lesser extent Italy) is similar to what happened in Wolfe's novel, a lot of plot whose ending is known. Investors just want the book to end. Bankers want to squeeze their debtors until the political systems that created the debts are broken.

What sounds the “all-clear” is a simple statement of bankruptcy talks. Acknowledge the Greek reality, appoint a set of bankers to work out a settlement, negotiate the settlement and then walk away. If banks are broken in this process so be it. Greece can pay a portion of what it owes in euros or, if it prefers, leave the euro and pay it all off in drachmas, which they can inflate to their hearts' content.

Once an orderly bankruptcy is complete we have a template for any other European country with outrageous debts they can't pay. That's a better solution than found during the American fiscal crisis of 2008 and would be the call to pull money out of America and put it into Europe in a very big way.

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