David Rosenberg on Greece

Right now Greece has center stage. In a report of Rosenberg’s latest comments (see Zero Hedge: On Growing Tensions, Spreading Global Downturn And A Dead-End Greek Resolution), the following statements appear:

Well, look at the bright side. At least we’ll know whether Greece decides to stay or go within the next month since the second-round election in June is being widely viewed as a referendum on continued euro area membership. Incredibly, the polls show that 80% of Greek citizens want to stay in. The problem is that they also want more bailout money with fewer stipulations.

The country would likely need a 30-40% devaluation to put its economy on a more competitive footing. The financial disruption, based on many estimates I have seen, would cost Europe something in the order of 2-2.5% of lost output. Greek’s total public and private external liabilities amount to $540 billion U.S. dollars — the ECB, the IMF, banks and a swath of other foreign creditors would suffer deep losses.

This poll and Rosenberg’s other comments generate a number of observations.

  1. Socialist entitlement sentiment is alive and well and in full bloom in Greece. This is the expectation of unearned and unrealistic benefit from the nanny state, which in Greece’s case is the set of central institutions of the EU and the eurozone since its own immediate government is bankrupt.
  2. The next election will likely be won by pro-EU parties in a desperate attempt to keep the benefits flowing.
  3. The EU and particularly Germany are on the horns of a dilemma. There will be an enormous financial cost if Greece leaves and defaults, possibly of catastrophic proportions. If Greece is to be supported in eurozone effectively, there will be ongoing financial costs that at some point will amount to the same as a default.
  4. The productive differential between Greece and the rest of the EU is equivalent to the 30-40% devaluation to put its economy on a more competitive footing. This is a measure of the cost of supporting Greece forever in its present state although we have no idea how to turn this into a figure in euros.

Widespread discussion now manifests a clear expectation that Greece will likely leave the eurozone and possibly the EU. This discussion is occurring largely outside of social and geopolitical considerations that could see a result precipitated by revolution or a military intervention (Greece has a history of the latter).

Our summary thoughts are:

  1. It would seem obvious that the current situation cannot go on indefinitely and so as someone famously observed, it won’t.
  2. Although we have boldly – foolishly? – made predictions of the direction that events in Greece will take, we now believe that no one can make a reliable prediction of the path events will follow.
  3. We do believe the situation is so precipitous that unless extraordinary action is taken, a Greek default will happen soon. This will center around Greece’s financing requirements and bailout money already promised. This in turn should yield a known set of near-term dates where critical decisions will have to be made and actions taken.
  4. There is talk of a reorganization of central institutions to allow direct financing by the ECB. This may defuse immediate crises but would simply make the overall problem – too much debt and socialist entitlement – more complex and larger, giving us a bigger crisis down the road.
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