Disclaimer. After nearly 40 years managing money for some of the largest life offices and investment managers in the world, I think I have something to offer. But I can't by law give you advice, and I do make mistakes. Remember: the unexpected sometimes happens. Oddly enough, the expected does too, but all too often it takes longer than you thought it would, or on the other hand happens more quickly than you expected. The Goddess of Markets punishes (eventually) greed, folly, laziness and arrogance. No matter how many years you've served Her. Take care. Be humble. And don't blame me.

BTW, clicking on most charts will produce the original-sized, i.e., bigger version.

Friday, June 17, 2011

The Greek Tragedy

Though there is obviously a clear risk that the Greek disease will spread to the Ireland, Portugal and Spain, there is a key difference between Greece and the other PIGS.

Michael Pascoe -- one of the more thoughtful journos writing about finance -- in an interesting article in Melbourne's The Age discusses why:

Greece itself remains an insignificant, hopelessly corrupt and inefficient economy that shows no sign of changing any time soon. Michael Lewis, author of Liar's Poker, The Big Short and Moneyball, among others, has written an enjoyable feature on the mess for Vanity Fair. A small example of his examples:
The average government job pays almost three times the average private-sector job. The national railroad has annual revenues of 100 million euros ($134 million) against an annual wage bill of 400 million, plus 300 million euros in other expenses. The average state railroad employee earns 65,000 euros a year. Twenty years ago a successful businessman turned minister of finance named Stefanos Manos pointed out that it would be cheaper to put all Greece's rail passengers into taxicabs: it's still true. “We have a railroad company which is bankrupt beyond comprehension,” Manos put it to me. “And yet there isn't a single private company in Greece with that kind of average pay.” The Greek public-school system is the site of breathtaking inefficiency: one of the lowest-ranked systems in Europe, it nonetheless employs four times as many teachers per pupil as the highest-ranked, Finland's. Greeks who send their children to public schools simply assume that they will need to hire private tutors to make sure they actually learn something.
And there's more:
The retirement age for Greek jobs classified as “arduous” is as early as 55 for men and 50 for women. As this is also the moment when the state begins to shovel out generous pensions, more than 600 Greek professions somehow managed to get themselves classified as arduous: hairdressers, radio announcers, waiters, musicians, and on and on and on.

None of this is true of the other countries in trouble.  Ireland foolishly guaranteed not just bank deposits but also bank bonds and even bank loans which produced an eye-watering deficit of 32% of GDP.    Eric Reguly of Toronto's Globe and Mail points this out in this excellent article:

In each of the three, but mostly in Greece and Ireland, there is no sense of shared sacrifice. Everyone – politicians, tax evaders, teachers, executives, bankers – is responsible for their countries’ financial and economic calamities. Yet it is the European Union banks and their senior creditors who are suffering the least. Their gain comes from everyone else’s pain.
European Central Bank president Jean-Claude Trichet will not hear suggestions of a Greek debt restructuring as Athens tries to negotiate a second bailout package.
His fear is that forcing private bondholders to take losses would destroy the Greek banks and severely damage the rest of the European banks with heavy exposure to Greece, potentially triggering a second European financial crisis (Royal Bank of Canada’s investment arm estimates that European commercial banks hold about €90-billion [$125-billion] of Greek sovereign debt). Mr. Trichet’s probable ECB successor, Bank of Italy boss Mario Draghi, has endorsed the ECB party line.
If the European banks and their bondholders are to be protected, the costs of the bailout, by definition, have to be borne by the taxpayer. Based on the latest economic and employment figures, the taxpayer is getting hammered as the austerity programs demanded by the EU, the ECB and the International Monetary Fund kick in with a vengeance.
The latest Greek labour and economic data are grim. The unemployment rate has climbed to 16.2 per cent. Among the young (15 to 24 years old) it is 42.5 per cent, up from just under 30 per cent in 2010. For workers between 25 and 34, the rate is 22.6 per cent. First-quarter year-over-year gross domestic product contracted 5.5 per cent, against the forecast 4.8 per cent.
As GDP sinks, the unemployment figures will almost certainly get worse, dooming an entire generation of young, educated workers to the dole. No surprise that the protests and strikes are getting bigger and angrier. On Wednesday, Athens was paralyzed by a 24-hour strike that turned violent. Austerity programs and employment growth almost never go hand in hand.
 As for Ireland:
The shakedown of the Irish taxpayer is even less fair, to the point of cruelty. That’s because Ireland did not have an economic crisis so much as a bank crisis, one aided and abetted by the government. Dublin not only guaranteed bank deposits (which it had to do); it guaranteed most of the banks bonds, made a €40-billion commitment to buy dud bank loans and committed a similar amount to recapitalize the banks.
The result was catastrophic. The cost of the bank rescues more than doubled Ireland’s 2010 budget deficit to an astounding 32 per cent of GDP and pushed up its total public debt to GDP to almost 100 per cent from 65 per cent a year earlier. “The government got into debt by taking over its banks’ debts. In an unfathomable act of charity, this was done only to save the French and German banks,” said Marshall Auerback, global portfolio strategist at Madison Street Partners, a Denver hedge fund.
Who is paying for the reckless behaviour of the Irish banks? The Irish taxpayer, of course. Ireland is still in recession. The unemployment rate is 14.7 per cent and the jobless are leaving the country in droves to find work. “Writing assets down to fair value and then recapitalizing the banks should be the first priority in restoring economic growth after a banking crisis,” Lombard Street Research economic consultant Leigh Skene told The Guardian. “Sadly, Europe went in the opposite direction and tried to ensure that no bank, regardless of how insolvent [it was], defaulted on its liabilities.”

The banks shouldn't have lent to Greece; the Greeks shouldn't have borrowed; the banks should have been forced to wear the cost of bad loans in Ireland, and the truth is, they probably will.  Pretending that it isn't happening is just the sort of stunt bureaucrats and pollies pull.  It won't wash.

Meanwhile, the forced austerity has made things worse by plunging both Ireland and Greece deeper into recession, so increasing their budget deficits despite tax rises and spending cuts.  Proof, if you needed it (a) that Keynesianism works and (b) that creditors are often cretins.

Expect a Greek default, probably dolled up as a "restructuring" and a shift in attention to Ireland.   But I suspect Ireland will not be allowed to fail.  The ECB and the banks will have learnt their lesson after Greece walks away from its debts.  Funny how we keep on having to do this.  You'd think all these highly paid bankers and executives would learn the lessons of history.  They haven't, so far, but they will soon.

No comments:

Post a Comment