Late last night when I was driving home from the cottage, I was listening to the Asian edition of Bloomberg TV on the satellite radio. It was past 11pm Eastern time, but I was amazed that Merkel, Hollande and Tsipras were still having meetings. It was four in the morning in Europe, yet these three were still talking. At that point a ‘Grexit’ was looking like the most likely outcome, and I assumed they were simply discussing ways to minimize the damage.
After the Greek referendum, the Europeans came back with an even tougher offer than the one the Greek people rejected. They used the excuse that the liquidity of the Greek banks and economy had deteriorated so quickly during the week of the referendum, more capital would be needed. But the reality of the situation is the Europeans had no choice but to offer a worse deal. If they had not extracted harsher terms from the Greeks, more European countries would use referendums as a form of blackmail to negotiate more favourable terms.
When the Greek people voted in favour of rejecting the previous European offer, the next step was obvious. The only question that remained was how far backwards the Europeans would retreat, and then what the Greeks would do from there.
During the week-end as details emerged about the hard line the Europeans were taking, I was struck by the severity of the demands. The Europeans didn’t just take a small step backward, but a huge leap. Although I was expecting them to back up, I under estimated the degree to which they retreated.
But Tsirpras’ next move was the truly shocking development. I assumed that since the Greek government had previously been pushing so hard during negotiations, they held a strong hand. I figured they had lined up a ‘Grexit’ with the Chinese or Russian backing. I actually assumed they had thought through the possibility of the Europeans refusing to cave to the aggressive Greek tactics.
We now know that the Greek government officials are not some master game theory tacticians, but instead the biggest bunch of riverboat gamblers since Austin Powers hit the blackjack tables.
The arrogance of these jokers is unbelievable. It is one thing to drive a hard bargain because you are prepared to accept the consequences of a ‘no deal’ conclusion, but it is entirely another thing to just assume the other side will eventually fold because you think they ‘need a deal more than you.’
This week-end when the Germans took a hard line with the large step backward, it was time for Tsipras to trot out Plan ‘B’. Instead, we found there was no backup plan, and Tsipras was forced to grovel to accept any deal he could.
And the really sad part of this whole debacle is the Germans showed absolutely no mercy, and stuck it to Greece as hard as they could. The new deal is draconian and has zero chance of working over the long run.
Forget about whose fault it is…
Too often market commentators get caught up making judgements about who is at fault. Although I do blame the Greek government for not having any backup plan (and also not seizing this golden opportunity to lead their country out of the EU shackles), assigning blame doesn’t help your trading account. Instead of trying to decide ‘what should be,’ let’s focus on ‘what is.’
Although the markets are celebrating the aversion of a ‘Grexit,’ this deal will not fix the underlying problems plaguing the Greek economy. In fact, the increased demands for more austerity and automatic spending cuts in the event of poor economic performance, almost guarantee the Greek economy will suffer a severe downturn from its already low level.
Greece is simply not competitive within the Eurozone, and by continuing in the union, the only way that situation can be resolved is for a massive internal devaluation in wages and costs. According to Hans-Werner Sinn, Chairman of the Ifo Institute for Economic Research:
Greece and Portugal have to become 30 to 40 percent less expensive to be competitive again. This is being attempted through excessive austerity measures within the euro zone, but it won’t work. It will drive these countries to the brink of civil war before it succeeds. Temporary exits would very quickly stabilize these countries, create new jobs and free the population from the yoke of the euro.
The Germans think the Greeks can fix their problems with more austerity. That is not going to happen. This deal will cement a Greek depression that will end up being worse than anything since the 1930s.
And let me ask you what happens to the Greek people in the mean time. What do you think the smart educated young Greeks do? They leave for other countries. And who is left in Greece? More old people living off unrealistic pension assumptions from an ever declining economy.
As risk assets rally on news that a ‘Grexit’ was potentially averted, they are mistakenly thinking growth will return. This hoisting of Germanic values on the rest of Europe is a big step towards less growth, not more. This will not bring back prosperity to Europe, but instead doom them to an ever decreasing share of the global economy.
Forget about the morality of it all for a moment. In this day and age of limited global growth with excessive debt burdens, trying to survive with hard money and tight fiscal policies only sentances your economy to importing the world’s deflation.
I understand that you cannot spend willy nilly without consequences either. I am no fan of the Keynesian idea about paying someone to dig ditches and another to fill in those ditches. That policy seems just as misguided as those who advocate cutting fiscal policy into a demand slump.
Yet the Europeans already tried austerity and tough love after the 2011 European credit crisis. During that period the Euro rallied and deflation engulfed the Eurozone. This pain eventually forced the ECB to usher in QE. However instead of learning from that lesson, the Germans are hoisting on Greece more policies that made QE required in the first place. This not a solution – it is merely kicking the can down the road. Not only that, it barely gets the can down the road at all.
What to do from here?
I don’t think you want to buy the rally on the hope Greece is solved. The market is overly optimistic about Tsipras’ ability to push this deal through his parliament. This deal is considerably worse than the deal 60% of the Greek population previously rejected. Now you might argue the Greek people did not understand what they were voting for when they approved the rejection. But this deal is just so bad, there is a good chance that Tsipras will be forced to resign. I think you have to give it at least a 50/50 chance Tsipras does not make it through the week as the Greek leader.
I don’t know how to handicap Tsipras’ marital status either, but you have to assume that given his complete capitulation to Merkel, Tsipras is going to spend some time on the couch.
Even if Tsipras manages to stay in his family home, and somehow gets the deal through the Greek parliament, then Greece is going to suffer from a depression that will ultimately have them begging for even more money. This deal is not a solution and therefore you shouldn’t be buying European risk assets on the hopes the ‘Grexit’ worries are behind us.
This deal is a victory for no one. Even the Germans, who think they have won, are simply throwing more good money down the drain. All this whole experience has taught us is how completely clueless most of these politicians really are…
Thanks for reading,