Canadian Investment Review

A spoonful of sugar

Written by Tristram Lett on Wednesday, July 15th, 2015 at 6:10 pm

1213599_pillsIn 2012, I published this blog post entitled “Why Greece Must Go”. In rereading it, there is not a single sentiment I would change from what I wrote then.

Since then, the trail left by Greece and its jetsam has been a tortuous one indeed right up to the curious situation she now finds herself in. Has anything changed? Not really. With its own currency Greece would at least have had some control over its destiny, the Eurozone would be rid of its problem child and financial markets and Fed Chair Janet Yellen would breathe a collective sigh of relief.

Instead we have the remarkable situation where the Eurozone (read Germany and the northern Europeans) and the IMF have essentially put Greece into their conservatorship. In the process Greece has given up almost every vestige of decision-making.

Lest we think conservatorship is a bad thing, we need to be reminded that two prominent American institutions, Freddie Mac and Fannie Mae, were put into a similar situation post 2008. They had combined annual revenue of $40 billion, about 1/6 of Greece’s 2014 GDP. These firms have thrived under conservatorship. But that was almost a no brainer when you take into account the mother ship called the Fed was basically buying all their bad debt and taking it onto its balance sheet.

Will Greece have a similar experience?

That depends… Simply enforcing more austerity, raising taxes and cutting pensions will continue to punish the Greeks for the years of outright fraud the country perpetuated in manipulating the data on the health of its economy. The final filth was its massive swap done in concert with Goldman Sachs to take non-performing assets off its balance sheet during the budgetary reporting period.

Again we need to be reminded that both Fannie Mae and Freddie Mac were playing exactly the same kinds of games in the run up to the 2007-2008 housing crisis. Obviously there are similarities here, but there are some significant important differences.

First is the astounding situation wherein Tsipras called a referendum for the public to express its opinion on the acceptability of the bailout terms. In a resounding No expressed by 60% of the voters, Tsipras was given a mandate to bail out of the bailout.

What did he do? Exactly the opposite and he accepted even more onerous conditions. Whether Tsipras can get the Greek parliament to accept these remains to be seen.

It is the act of calling a referendum and then ignoring its result that will create lasting problems for Greece. By galvanizing the public interest in such a manner, he has created a situation where resentment will flourish if its wishes are ignored.

A majority of Greeks will so hate this deal that they will do whatever they can to subtlety sabotage it. Naturally this dislike will be aimed at the northern Europeans. There is no question in my mind that at least a whole generation of Greeks will feel this way.

How can this difficult situation be defused?

The Eurozone conservators must swallow their Teutonic pride and initiate demand-enhancing programs sponsored by them but run by the private sector. Greece needs investment not punishment. There is a quid pro quo to many things.

As Mary Poppins sang, “a spoonful of sugar helps the medicine go down”.

If the EU creditors took this two pronged approach rather than the slash and burn path they are on, acceptance and cooperation from Greece will be much more likely.  Otherwise she should abandon the Euro and bring back the Drachma.

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