Friday, February 10, 2012

Will Greek Bailout Deal Falter Now or Later?


The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

The Greek bailout deal is once again falling apart. Whether or not it is patched together another time, the end will inevitably be an ugly default.

On Thursday, news sources around the world were trumpeting that the EU and Greece had come to terms that would allow Greece to receive a 130 billion euro bailout payment that would prevent the country from defaulting by March. But late in the day, EU finance ministers made additional demands on Greece. They wanted another 325 million euros in budget cuts, that the Greek parliament pass the cuts and that a written guarantee that the cuts will be still be implemented after the April elections. On one hand these demands are not surprising since the Greeks have been less than honest about their budget numbers in the past. On the other however, they are surprising because this could be the straw that breaks the camel's back.

Greece is in its fifth year of recession and its economy seems to be in an unrelenting downward spiral. This is happening because just like the United States, Japan and a number of other nations, the economy is dependent on government spending made possible by huge budget deficits. Each time Greece has been forced to cut its budget deficit, the economy has shrunk some more. Additional cuts will only cause additional contraction. Although they receive little coverage by the U.S. media, riots have become common place in Greece (there is currently a 48-hour strike). Democracy might itself be threatened there. Greece does have a history of military dictatorship, with a military junta running the country between 1967 and 1974.

Lately, the country is becoming increasingly politically unstable. The far-right LAOS party, which is part of the governing coalition, has refused to support the new terms of the bailout. Its members resigned the coalition today. Even more disturbing, Reuters has reported that the Federation of Greek Police has issued the following statement to Greek officials: "Since you are continuing this destructive policy, we warn you that you cannot make us fight against our brothers. We refuse to stand against our parents, our brothers, our children or any citizen who protests and demands a change of policy. We warn you that as legal representatives of Greek policemen, we will issue arrest warrants for a series of legal violations ... such as blackmail, covertly abolishing or eroding democracy and national sovereignty."

Even if things are patched up once again and the next bailout payment is made, there will still be another one after that and even more to follow.  Greece is like the family that is only one paycheck away from homelessness, except one welfare check away from homelessness would be a more apt analogy. Eventually, something will give and this will have a major impact on the world financial system.

The real crisis in Europe is not Greece in and of itself, it is the stability of the banks in France and Germany that have lent money to Greece (and Italy, Spain and Portugal). These banks are in precarious shape and a Greek default will have similar consequences to Lehman's collapse in the fall of 2008. Expect the central bankers of the world to unleash a tsunami of money-printing liquidity into the system to stabilize it just as they did in 2008. They will be quicker this time around, so the collapse should be briefer. 

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

1 comment:


I see no solution to the worldwide fiscal problems.