Greece – Is It Going To End Horribly?

Updated 2 July 2015

Like Walter White, the protagonist of television’s modern day Greek Tragedy Breaking Bad, Greece has itself been cast as several conflicting characters.

It can justifiably be considered a victim, and a villain. Comparisons to a patient with a terminal disease are not unfair, but more than a few consider it to be public enemy number one.

And yet, as in AMC’s award winning show, there is a sense that there is simply no scenario whereby this works out well for anyone involved.

The problem is not so much Greece itself. The nation’s economy is tiny in relation to the entire EU at around 1.3% of the entire bloc’s GDP, and the comparably sized Argentina defaulted outright in 2001 without sending too many ripples through the global financial system.

The problem is that the Greek crisis lays bare the flawed foundation upon which the entire European project has been built. And to date, there has been no coherent explanation as to how, or if, those flaws can ever be truly repaired. While the constant reassurances of European leaders to “do whatever it takes” may comfort us that their hearts are in the right place, they do not address the fact that some things in life, and economics, are simply impossible.

Prior to the GFC the apparent necessity of the EU as a political means of ending centuries of bloody conflicts led many investors to assume that nothing now could conceivably break it. The euro was an early success, and the artificially cheap credit it granted to peripheral nations (the PIIGS as they came to be known) led to a consumption driven boom upon which the German economy’s export machine thrived.

Greek debt was a particular favorite of many lenders, as it yielded a few more basis points than the benchmark German Bund, and was considered to be effectively backed by the credit of the latter.

What happened after is a well documented series of panics, crises and bailouts that happened with sufficient regularity that markets became almost numb to them. But there was a critical change: the ejection of a ‘permanent’ eurozone member had gone from a theoretical imponderable, to a very distinct possibility.

That distinct possibility has now progressed to a very real, and scarily imminent probability. The laws of economics have caught up with the utopian ideals of the European project, and the implications are enormous.

What happens next is anyone’s guess, but I’ll venture mine.

I see no viable means by which Greece can remain in the EU. It is bankrupt by any financial measure, and with unemployment topping 25% has been wallowing in outright depression for several years.

Its economy continues to contract, its debt load continues to increase, and there is no sane explanation of how the debt will ever be fully repaid. Solutions to the problem boil down to writing off the debt (which Germany cannot politically stomach), or piling on more debt in the form of bailouts and loan restructuring.

Debates over the merits of austerity measures as a means to rein in the government deficit have lost relevance – they have failed, and the interest burden on the debt alone has now become unserviceable.

The imposition of capital controls, closure of the country’s banks, and yesterday, its missed payment on an IMF obligation all signal that the country is now closer to the brink than imaginable even a week ago. The bizarre decision of the Greek government to hold a referendum on the issue inspires no further confidence, and may serve nothing more than to back all parties into a position from which they cannot extricate themselves.

That said, I’ll hedge my bets by acknowledging that even by the standards of politicians, policy makers in Brussels are grand masters at kicking the can down the road. I’ll add further that signals from financial markets suggest alarm, but certainly not panic.

Whether today, tomorrow, or a year from now, Greece must leave the EU. It will be a terrible process for the people of Greece, and they can expect economic misery on a scale even greater than that experienced by Argentina, or the South East Asian ‘Tigers’ during 1997. Anything otherwise however, is simply prolonging the inevitable.

The question of what this event means for the Eurozone, and the world beyond it, will be the subject of my next piece.

By Aran Dunlop

Aran Dunlop is an ex-international money marker trader who was responsible for billions of dollars of bond trades. He now resides in Florida, and works closely with Steve McKnight, sourcing properties for the Passive Income Fund.