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Greece is Not Lehman 2.0... As I'll Show, It's Much Much Worse
Investors simply do not understand the significance of Greece. Comparisons are being made to Lehman, but these comparisons are mute for the following reason: Greece is a country not a private institution.
This is not a subtle difference. True, Lehman’s derivatives were spread throughout the global financial system just as Greek sovereign debt is. However, investors are missing the point of the fall-out a Greek default would create.
Firstly, let’s think about Lehman. When Lehman went under, half of the other banks that were in trouble had already been merged with larger entities (Bear Stearns, Merrill Lynch). Those banks that were still standing after Lehman went under, changed to bank holding companies (Morgan Stanley, Goldman Sachs) in order to receive special access to Fed lending.
None of these options exist regarding the sovereign crisis in Europe today. If Greece defaults, Portugal can’t merge with Spain. And Italy can’t suddenly change itself to a new form of country that gets special treatment from the ECB (it’s already getting special treatment from the ECB by the way).
This cuts to the core issues for sovereign defaults in the EU. Here are the facts regarding those EU countries on the verge of collapse:
1) You cannot solve a debt problem with more debt
2) Austerity measures slow economic growth which in turn makes it harder to meet debt payments
This is simple basic common sense. But these are the policies being promoted by EU leaders: we’ll give you more money if you implement more austerity measures to get your finances in order.
The fact of the matter is that there is simply no way on earth that Greece can get its finances in order (short of a massive default). Greece has terrible age demographics, a lack of economic growth, and cultural issues (e.g. paying taxes is for suckers) that it impossible for the country to solve its financial problems.
In plain terms, Greece racked up too big of a tab and simply doesn’t have the means of paying it. End of story. The world needs to realize this. Because Greece will default and it will default in a big way,
The impact of this will be tremendous. For one thing, pretty much everyone is lying about their exposure to Greece. Consider Germany for instance. According to the Bank of International Settlements German bank exposure to Greece is only $3.9 billion (though they state this is only on an immediate borrower basis).
This is a bit odd as according to The Guardian German banks have nearly 8 billion Euros’ worth of exposure to Greek debt. And they only include 11 German banks in their analysis. However, of those 11 banks, THREE of them have Greek exposure equal to more than 10% of their total outstanding equity.
My own analysis, which I recently shared with my clients, shows even these numbers to be way below the mark (one of the “strongest” banks in Germany alone, by its own admission, has twice the exposure to Greece that the Guardian claims).
So, when Greece defaults, the fall-out will be much, much larger than people expect simply by virtue of the fact that everyone is lying about their exposure to Greece.
Secondly, when Greece defaults, the other PIIGS (Italy, Ireland, Spain, and Portugal) will have to ask themselves… “do we opt for austerity measures and more debt which obviously didn’t work for Greece and will only stifle our economies more? Or do we also default?”
That’s a very tough question to answer. But I’d wager more than one of them will opt for default. And if you think European bank exposure to Greece is understated, you don’t even want to know how bad exposure to Italy and Spain is (to give you an idea, the German bank I referred to earlier, again by its own admission, has total PIIGS exposure equal to 60% of its equity).
Folks, the European banking system is in huge trouble. This won’t be Lehman 2.0. This is going to be something far, far worse. Some of these countries are already sporting unemployment of 20%. What happens when their largest banks go under?
Also, remember that the EU is:
1) The single largest economy in the world ($16.28 trillion)
2) China’s largest trade partner
3) Accounts for 21% of US exports
4) Accounts for $121 billion worth of exports for South America
It’s clear the EU is already heading into a recession without a banking crisis hitting. What do you think will be the impact when Europe as a whole experiences its own “2008” only on a sovereign level?
We are literally on the eve of a Crisis that will make 2008 look like a picnic.
On that note, if you have not already taken steps to prepare for the next round of the Crisis now is the time to do so while the system is still holding together.
For more of our free daily market commentary, investment strategies, and several FREE reports devoted to help you navigate the coming economic and capital market changes safely swing by www.gainspainscapital.com.
Best Regards,
Graham Summers
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I see the Keynesians are out there multiplying.
But those gardeners take their paychecks and buy food, gas, electricity, and pay taxes with that money. If they aren't getting a paycheck then less or even none of that activity takes place.
I think government spending needs to be about 5% of what it currently is, but we can't ignore the necessary period of economic correction as that decrease plays through the economy.
Actually, I don't think many Greeks pay taxes.
They are the world's leader in cash only businesses, and they do not give receipts!
Well, at least they don't have to worry about revenue taking much of a hit then...
According to your logic, we could pay them to throw rocks at windows and that would generate even more activity. They might even be doing that now.
No. what would happen without the corruption, is that they would get other jobs that actually produce some value. They still would be paying for all those things as before but they would actually add to the economy.
Sure, of course, I said as much in a comment upstream. But do they go out the very next day in an economic depression and find those jobs? Of course not. So...
I would repeat what I believe about government spending in general but it's likely you're already crafting a response based on incomplete information.
I love a story with a happy ending, why hasn't this got one?
Fixed it for you.
Oh dear, there goes what little credibility Graham had left.
Seriously.
We don't know the difference between moot and nute but we're supposed to listen to his opinions regarding finance.
See you hit the moot button.
Good points made.
However, this part:
...seems to be a pretty ingrained philosophy, but I don't think it is correct.
Austerity just means the government pays out less. They still collect tax revenue (in theory, of course in Greece this system is imploding) but they pay out less.
I think it needs to be understood that the Government taking in less and paying out less is good for the economy and "capital formation," i.e. savings.
People need sound money, property rights and the freedom to keep what they earn. Propserity follows immediately.
If government spending decreases, GDP contracts, and so tax revenue decreases along with it. There's a period of severe economic decline when government spending decreases before actual recovery based on actual capital begins.
It's gotta happen for a sustainable recovery, but it won't. Think of the children...
This belief is based on the faulty assumption that government spending is what makes a nation productive.
No it's not, because that's not my belief. You're replying to something other than my point. Government spending on asinine social programs and military adventurism is crushing the entire world. We're witnessing it first-hand.
Now that that's out of the way, onto my actual point, again: withdrawing current government spending will cause an immediate and vicious downward correction in the overall economy. This is a good thing. We have to get back to a point where actual capital is formed and invested for us to have any hope of a real recovery based on sound economic principles. This cannot happen while the government distorts entire markets and punishes savers with negative real interest rates. If massive government intervention and spending, especially deficit spending, continues then we will stagger and lurch along until we fully hit the wall and experience full-blown catastraphic economic collapse.
But, if you give lip service to "getting the government out of the way" without acknowledging the painful period between doing that and seeing positive results in the economy then people are going to think you're full of shit, plain and simple.
You beat me to it. I would just add that a sovereigns debt is priced by their macro economic labels, say GDP, Debt to GDP, etc. So as an economy contracts due to reduced government spending, the price of their debt should also change accordingly unless it's all "priced in" right?
Basically governments at this point need to reduce spending to what they can take in from taxes period and stop deficit spending. If that means they can't roll over previous debt then they need to default on that debt they cannot service. For any country there would be a spiral downwards as spending decreases as does their GDP as do their taxes until they hit bottom and the size and spending of government is in equilibrium with what they can tax.
Most of the developed world is completely out of whack in this regards as they have been able to issue phenomenal amounts of debt into the world markets without anyone really questioning the reliability of said debt.
it's a non-linear system. Our minds aren't capable of understanding how non-linear systems react, so we try to make them linear over a limited range of experience (Laffer curve, for instance).
A black swan is simply a system reaching a non-linear regeme that no body had extrapolated yet.
What is happening to Greece is criminal. Either they default next month or a year from now, only a year from now more people will be dead of starvation/disease/cold, and their economy would have ground to a complete halt.
Make no mistake, the banking class of the US would tolerate the same conditions here if it meant they got paid back (an impossibility).
If nothin changes.
But how bout somethin like a voluntary haircut that dont trigger CDS's?
Just suspend one more area of financial reality for Greece. No biggie. Keep muddling along. Suspend reality in another area when the next can is kicked close to the wall.
Then let QE to infinity do its sneaky duty!
you have scared the shit out of Scrooge mcDuck. Hes bunkered into his gold hide-out untill this blows over...
No way jose, SMD is snapping islands in the Aegean at phenomenally low prices.
What crisis?
more of Graham's SPAM
Graham is Zerohedge's resident lightweight. The people that read this stuff must be new here.
And yet you commented popo?
I also was wondering what new tidbit he would toss over to justify that headline.
Approximately nothing it seems.
Agreed.
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