Will The Real Greek Tragedy Please Stand Up

Includes: FXE, GREK
by: Doug Meeks

Greece is a small country. It might make it into the top 10 cities in the US. With a GDP of about 300 billion and falling, Greece looks to hit the scale somewhere between Boston and Atlanta. The Greek GDP is also much smaller than the market capitalization of Apple (NASDAQ:AAPL).

* Map curtsey of theatlantic.com from an article by Richard Florida, shown here.

So why does a country with an economy the size of Atlanta make headline after headline? The Greek problems represent the differences between all the EU cultures. It's an old problem and one that worries anybody who has a stake in it holding together.

I visited Europe before the common currency and open borders were in place. I enjoyed the different countries and currencies. Lira one day for gelato in Florence and schillings the next day in Vienna. Jump on a train and get some forints in Budapest and enjoy life. I loved the differences of culture and country as a simple visitor. I understand how the different people groups in Europe must feel about their home nationalities. They are not the same country and they never have been. Last year I saw a brand new grave stone in an old old cemetery on a hill in Florence, it simply read, "un Italiano". I think that sums it up for the Greeks as well, they are the Greeks.

Yes, default and currency exchange/revaluation is a tough road to go down but it has happened many times in the past. Let's look at Argentina in 2001 and Ecuador in 2008.

Ecuador, has kept the currency pegged to the US$ since March 13, 2000 (the US$ IS the Ecuadorian currency). While keeping the dollar peg Ecuador defaulted on $3.2 billion of debt in 2008. With debt costs prohibitively high after the default and a dollar peg on the currency Ecuador has had modest GDP growth for ten years. This is mostly the result of large oil exports acting as a stabilizing factor.

* GDP charts from http://www.indexmundi.com.

Argentina may be a better example because of size comparisons. The recession that lead to default began in 1998. It was a painful time for their economy. Default was declared in 2002 and restructuring was finished in 2005. A weaker Argentinean currency helped a boom in exports for Argentina. Foreign currency reserves had grown to $28 billion by 2005. In 2006 Argentina made a full repayment to the IMF for their 'help' in the crisis.

(click to enlarge)

Argentina has had strong GDP growth since a 14.7% contraction after the default. The GDP of Argentina recovered to pre-crisis levels in 6 years and has grown well since. Argentina's GDP was at $526 billion for 2011.

The REAL Greek Tragedy: I worry that the Greek austerity under the Euro will take away the natural competitive advantage that a falling currency would produce. Keeping the Euro seems to work against the historical benefits of a default. Why would the Greeks do that? If a people must suffer for their debt mistakes it seems natural to let them have a humble currency to encourage labor, export and tourism from abroad. These are the economic stresses that cause cultural resentment.

If Greece pulls out of the EU, it will have a short term effect in the markets. We might even have a rally. Monetary inflation will cover the losses at the money center banks in Europe and in the new Greece. No worries, in a finance driven world the banks are closest to the printing presses and thus the easiest to re-capitalize with out causing to many raised eyebrows.

I have some old Drachma around here so that means I'm ready for the Greek suffering and drama to come to an end. The only way that is going to happen is for them to pull out of the EU.

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