The Greek De Facto Default

Includes: DIA, GREK, QQQ, SPY
by: Avery Goodman

"The choice is not between sacrifice and no sacrifices at all, but between sacrifices and unimaginably harsher ones," Greek Finance Minister Evangelos Venizelos told a divided Parliament, as stormy debate concerning the impending default of the Hellenic Republic continued into the night.

Fear-mongering, of course, has a fine pedigree. Former Goldman Sachs Chairman and US Treasury Secretary Henry Paulson did an expert job of it. He convinced Congress the US would descend into martial law, if it didn't act immediately to enact a near-trillion-dollar bank giveaway now known as TARP. TARP and the $13-trillion worth of other giveaways, loans and guarantees by the US Treasury and Federal Reserve insured that the casino-banking industry would not suffer the consequences of its misconduct.

The casino bankers, of course, were and are the same folks who issued the derivatives that were and are the key catalyst for the continuing implosion of the world economic system. Fear-mongering by their man at the Treasury insured that money giveaways would be enacted in the US. That helped this group of well-connected incompetent men keep wealth and power. It even helped them grow richer, in the face of the implosion of their schemes.

Those who warn about the dire "cost" to Greece, of leaving the eurozone, are also fear-mongering. The Hellenic Republic is already in default, although it is a de facto, rather than an official one. Greece and the various banks that let it borrow money are being floated by the taxes and the stolen value of the euro, that comes from devaluing the cash belonging to innocent citizens in Germany, Holland, France, etc.

The bailout is designed, not to "save" Greece, but, like before, to save the bankers from the effect of the derivatives they've written. The main difference between the de facto default and an overt legal default, is that most costs shift from casino-banks to governments. The banks seek a shield against the consequences of imprudence and, to get it, they spin tall tales of the incalculable "harm" that would be suffered by ordinary people, if they don't get their way. It is all a lot of hogwash.

All that having been said, some leaders in Germany are beginning to realize that Greece is a bottomless pit. They are beginning to understand that an overt default is the best medicine for Greece, and for everyone else. Those who are steadfastly opposed are not the ones who will have already taken a 70% haircut on their Greek bonds. On the contrary, it is the casino-bank derivatives dealers who desperately want to avoid a default that would trigger their obligations. That part of the casino banking industry that issued tens of billions of dollars of CDS insurance against Greek default are depending on the ECB, IMF and other such institutions, over which they have a good deal of influence, to prevent it from happening.

But, for German, French, Dutch, and Finnish taxpayers, as well as taxpayers in the U.K. and the US (through the IMF), as well as the Greeks, themselves, it would be better if Greece overtly defaults. The fear of currency devaluation is overstated. Iceland defaulted. The exchange value of its currency dropped like a stone, just as the new drachma would drop precipitously. But, three-and-a-half years later, Iceland is recovering. Iceland was given large loans by the IMF to keep the flow of basic necessities going. Its robust fishing industry and an improvement in general exports is helping to pay them back. In contrast, under the current austerity, Greece will never recover.

The deep drop in the exchange value of the Icelandic krone allowed exports to soar. Greece also has valuable exports, including having one of the largest fishing catches on the Mediterranean. Its citizens also own the single largest maritime cargo fleet in the world. The maritime industry's income is denominated in US dollars, but its costs will be denominated in depreciated Greek new drachmas. Greece is also one of the largest olive and fruit exporters in Europe, and has a huge tourist industry that is weighed down by the costs imposed by the fact that Greece is in the eurozone.

Who is better off? The Greeks, who are "in" the eurozone, or the Icelanders, who are not? The prospects for Greece in the eurozone are grim. It faces years of declining GDP even if it manages to win the bailout. Greece should never have been a euro-nation. It entered by means of a derivatives-based fraud concocted by its former government, and assisted by two of the largest American casino-banks. It is right and proper that it should be forced to leave.

Leaving will cause high levels of economic pain. But, economic pain always occurs in times of great change. The pain is not so different from that inflicted upon an individual who mismanages his finances to the point of being forced to declare bankruptcy. Even greater pain will occur if and when Greece meets the demands for austerity. Once a new government is elected, it is not likely that the pledges by the current Greek Parliament will be kept.

No matter what happens now, Greece will eventually default in an overt way. The "powers-that-be" are now engaging in fear-mongering and double-talk to delay long enough to assist the derivatives dealers. The recent Parliamentary vote "approving" austerity, may or may not suffice to accomplish a long delay, but it will accomplish some delay. However, the inevitability of default has not changed one iota. Greek GDP is declining. The Hellenic Republic has not managed to successfully crack down on corruption and tax avoidance. Government revenues will continue to decline. There simply will not be enough revenue to make the payments even on the remaining debt.

Without sufficient revenue, Greece is not a viable operation, no matter of how many multiples of $170 billion the international community sends down its drainpipe. Investors should not be lulled into a sense of complacency. Instead, they should prepare for the inevitable event. Things may fall apart later than previously expected, but fall apart they will. Investors can refer back to my previous article for insight into how to deal with, and react to the eventual Greek default. Although the timetable may have changed, the event will still occur.

From an investor's standpoint, the eventual Greek default, when it happens, will be deflationary to asset prices, in the short term. Smart investors should be in a position to buy assets for discounted prices. The longer term effect, however, is going to be highly inflationary, as confidence in sovereign bonds, and, therefore, fiat currency will be shaken.

Central bankers, who believe in Keynesian economics, will always think the answer is to print money to fill the void. This will continue to artificially inflate easily tradeable and highly liquid assets, such as gold, silver, platinum, oil and other commodities. It will also help the nominal value of the S&P 500 (NYSEARCA:SPY), DJIA (NYSEARCA:DIA), and NASDAQ (NASDAQ:QQQ) stocks to float on a sea of liquidity for a much longer period of time.

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