Beware Of Greeks Returning Gifts: Push Them Into Default

Includes: DRR, EUO, SPY
by: Stephen L. Weiss

JP has been cutting my hair for about 15 years. He says the initials stand for Jean-Paul but given his decidedly Asian roots, that would be akin to Woody Allen claiming his real name is Frederico Fellini. But I understand that working in a salon versus a barber shop requires a higher end nom de plume. JP’s hands shake, not a great affliction for someone who makes their living holding a sharp instrument to someone’s head; actually not great for the customer either. But I like JP, and although most who see me would likely disagree, I think he does a decent job. Until the Greek crisis grabbed the headlines, I never attributed his shaking to having held a pair of shears in his hand as a hazard of his employment. All that has changed.

Me: Sorry, JP, but I have to call you my barber from now on, or hair cutter, if you prefer. You choose.

JP: I am a hairstylist, not a simple barber.

Me: Wish I could agree but you’re on the downside of 50 and the standard for a hairstylist, according to Greek doctrine, is that you retire at 45. Anyone who can’t afford to retire at that age is no longer a hairstylist but rather a barber.

Is there any doubt in anyone's mind that if Greece stays in the EU, that we will be revisiting the debacle in 3 months, 6 months, 9 months and every day in between? My solution to getting their foot off the neck of the global markets is to let them go, push them into default. That is the only way to put this behind us and move forward. Short term pain for long-term gain. Clear the decks and onward and upward. Okay, enough clichés. The overriding issue is that the profligate countries have to be weaned off the golden teet of Germany and, to a lesser extent, France. Berlusconi has attempted to re-trade Italy's austerity plan by extending the implementation date for hiking the retirement age. Ireland is seeking to re-trade their agreement. At some point a deal has to be a deal and those living in violation of those agreements have to face the consequences of non-compliance.

By allowing Greece to default, or pushing them into default (read: bankruptcy) others will get in line. Of course, there has to be a shock and awe safety net for Spain and Italy were Greece to default but the ECB can and should provide that. No sense being foolish about this - have to limit the contagion. There will be enough unintended consequences as a result of this strategy but my sense is a Greek default won't come as a surprise to anyone. Of course, the CDS holders will get paid and those that wrote the insurance, or took the other side, will experience a result they weren't counting on but there is a benefit here. The CDS market will shrink; CDS writers will understand that countries can go belly up driving the cost of the derivative significantly higher. With the shrinking of the CDS market, high risk investments will decrease, involuntarily chasing high risk takers (read: French banks and former New Jersey Governors) out of the market.

Were this to happen, it may temporarily prop up the euro but make no mistake about it, the euro is going lower. Europe is trending into recession and the only way to combat contracting growth is by easing as Draghi did recently. The U.S. economy is getting stronger while the rest of the world is weakening. That translates into short Europe against long dollar. Right now the euro seems to win both ways; that can’t last forever.

Disclosure: I am long EUO.