In April 2010 I authored a concerned and prescient plea entitled, "Greece News & My Disgust," within which I penned such wisdom as:
The current plan inspired by Greece's big brothers is not feasible. It will only open up black markets, torch the streets of Athens and lead more Greek wealth to leave the country." My prediction did not end there unfortunately, and I hope it is never fulfilled, because I said, "It will only usher in a radical government to replace the current.
While Greek stocks and the shares of those traded on U.S. exchanges have begun to account for the pessimistic scenario I paint in the paragraphs which follow here, European shares seem to reflect a new view that Greece might not prove contagious to the region after all. I believe that viewpoint will be proven wrong if the Europeans dare to allow Greece to fail. Unfortunately, I also believe such a failure carries risk to our economy, the global economy and to the shares of American firms. My reasoning is not just for the 20% of our exports that go into the flailing European market, but due to the interconnectedness of the global economy and financial system. In that regard, recent efforts by the ECB are geared to soften such a blow, but they will not account for the pressure that will be applied across the PIIGS of the EU, and how capital flows may erode global stability. Finally, given the Iran trigger that is now cocked, global trade is likewise threatened.
The Greek Problem is Our Problem
The rating agencies are correct about Greece. The nation of my forefathers will default on its debts, despite all the latest efforts of the Greek government and the EU. It's a shame that a bleak end seems inevitable for Greece, given the great sacrifices of the Greek people. Yet, it's only inevitable because of the blind, bullheaded nature of thinking leading governments today, including in Greece and across Europe. I'll be offering several creative ideas for legislators that should be digestible to most of them, yet will likely be ruled out because of their out-of-the-box nature, and due to the hard work that would be involved in implementing them. It's much easier to sign on to pay and pension cuts, until the people will have no more of it, at which point pain is returned to sender, and perhaps earned due to disconnection and ignorance.
Fitch downgraded Greece last week to a level predicting default and S&P cut the Greek Republic this week to a mark indicating "select default". The rating agency actions were despite the Greek government's efforts to reduce the country's debt burden and to cover its current principal and interest payments via troika payout. Greece took the strides necessary for it to assure it could survive through its latest deadlines, but that will not be enough in the end, because they are also undermining themselves with increasingly deeper austerity. Greece will effectively force its private debt holders to swallow a deep cut in the value of their loans through legislation. That move in itself is indicative of default, but remained an option for the already understood to be unreliable sovereign debtor.
When they naively promised not to issue any new austerity measures last year, government representatives Venizelos and Papademos showed a lack of economic foresight that matched poorly against the technocrat label of the latter. That said, judging by the poor excuses passing for economic plans prevailing across the spectrum of decision makers today, the two have plenty of company in poor judgment. Venizelos simply accepts the prevailing option offered up by the majority of intermingled and politically corrupted economic minds, but Papademos should know better.
Our leaders, globally, look to me increasingly like blind mice traversing through a field of big cats. Yet, I fear an overhaul of them would only usher in more ignorant minds with more dangerous courage. For some sad reason, the European actors in the Greek tragedy were somehow surprised when they bumped into revised lower Greek economic activity which left debt levels short of agreed upon watermarks for aid delivery. In Mid-February, fourth quarter GDP fell short of expectations, cut to a level indicating contraction of 7.0% in Greece, down from 5.0% contraction in Q3.
A surprise to the blind, the decimation of the Greek economy was of course exacerbated by austerity, which was something that I warned my followers would happen from day one. Perhaps the captains on the hollow hill will not overlook my advice planned for publishing over the weeks ahead, through which I will offer a series of lifesaving strategies for Greece, Europe and the global economy. I hope I will at least be able to communicate my ideas well enough for them to reach a few ears that might help make a difference. If not, perhaps I'll come home to clean house.
Greece will certainly default, because the trajectory plotted by its pilots is flawed. Greek navigators from the famed island of my descent would see that what Europe and Greece have done is negligently plan a path that fails to compensate for all factors. It is as if they have plotted a critical course without compensating for the gremlin wind. Thus, we continue to find ourselves obscenely off-course. Now that Germany and a few other mini-members have promised their constituents that no new aid will be issued to Greece, the destination is determined and it is the bottom of the Mediterranean Sea. Though some see the latest promises as political, and so easily undone when the surprise of unmet fiscal goals and uncovered debt expenses resurface after elections across Europe and Greece this year. If that is the case, like Venizelos, they will open their mouths, shrug their shoulders and pass a new tranche of aid as fires fury at their feet.
Without creative thinking, including the ideas I will present shortly to whoever will listen (including the few important ears attendant to me in Greece) Greece will certainly default. With that, spreads will certainly widen for the Portuguese, Spanish, Italians and probably the rest of the previously considered to be untouchables. So whoever is in political office post elections might do better to reconsider political ploys to remain there, because a burning seat is worse than no seat. At the same time, the abandonment of Greece is not the optimal direction for Europe, and may even work more in favor of Greece when Europe fails anyway.
"What I suggest is to save Greece, but by helping Greece to save itself rather than to starve itself."
What I suggest is to save Greece, but by helping Greece to save itself rather than to starve itself. Since the global market is clearly intertwined, it is in the global interest to put the best minds to work developing creative and immediately value-adding strategies into effect. My first suggestion will be one that will require global consideration and approval. For the sake of the globe, I hope it is seriously considered and employed. Stay tuned…
The Default Disaster Missed by Markets
Unless creative ideas are embraced, Greece, Europe and probably the global economy will disintegrate, for related though separate reasons. Given my lack of confidence today in our global leadership, I would shy far from celebrating the stocks of Greece, Europe and even the United States to a lesser extent, if not the world. The argument is only solidified by the Iran trigger, which I'll soon have more to say about. So the high flying Global X FTSE Greece 20 ETF (NYSE: GREK), up 13.7% since inception, though down 12% since my recent warning, should move even lower.
Likewise, European shares, contaminated by where the EU's terrible trajectory will take them, are likewise threatened. The iShares S&P Europe 350 Index ETF (NYSE: IEV) is up roughly 11% through February, and slightly higher since my sell call. This is because European investors could initially view the prospect of a Greek exit from the euro-zone as a positive, but I expect they will be wrong. The Vanguard European ETF (NYSE: VGK) is also up roughly 12% year-to-date, and a bit higher since the February 7th based call. Deutsche Bank (NYSE: DB) shares are up roughly 24% year-to-date on, dare I say, a premature vision for European recovery.
Reflecting capital flows and prospective hope, American financials like Citigroup (NYSE: C) shares are also up about 28% this year. The financial sector, defined here by the SPDR Select Sector Fund - Financials (NYSE: XLF), is up roughly 15%. Reiterating, I see these latest capital gains at risk across the spectrum, though at varying degrees and on perhaps different timing, based on the above detailed economic reasoning. Therefore, I issue this plea to the world's preeminent minds, solve the Greek problem for the sake of global market stability. And you might want to make some time for Iran as well, before we lose civil order to chaos.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.