Via Mark Grant, author of Out of the Box,
It was January 13, 2010 when I first wrote in my commentary that I thought Greece would go belly up. It was in May 2010 when they first needed to be bailed out. This small country with a giant debt of $1.3 trillion has engaged the markets ever since. Sunday the country votes and whoever wins I expect no massive explosion in the short term. The new Greek government will try to renegotiate the terms and conditions of their bailouts and we shall see just how far anyone is willing to go. It will be a game of chicken with Germany in the end and a solution perhaps will be found but no good one as Greece could not pay back their current debts if Hercules arrived to help; much less any new debts which will be required to keep the country afloat. Any “Big Bang,” if it comes, will not come on Monday morning as that will just be the beginning of the process to scream and shout and dance around like some Opa bar with Ireland, Portugal and Spain demanding equal terms and, oh yes, Spain will be in the hand-out line soon enough along with their banks.
Perhaps that all of this has gone on for so long or perhaps because we keep hearing the cries of “Wolf” each week for the last several years that the markets are impervious to any new cries for help. An odd kind of complacency seems to have set in where nothing matters too much and everything will just be fine. Yesterday’s equity market rally based upon the central banks providing liquidity is just what any serious observer would expect and yet the stock markets rallied as if this was something out of the ordinary which clearly demonstrates either the market’s lack of understanding of real world events or it represents the hype of some hedge fund that was tossed around in the media like it was a new product at Apple. In any event, don’t wake up on Monday morning and think that Greece will have left the Eurozone and returned to the Drachma. That is not how things will play out.
At some point, in the next few weeks, it will come down to a calculation of just how much money the EU is willing to spend to support Greece and not cause a default and if Greece is to leave the Euro I think it is much more likely that they will be forced out rather than leave on their own decision. In the meantime the situation in Spain will worsen as the needs of their banks and of their Regional debts throw the country past the borderline of self-help. Aid will be called for in increments and it will probably total $350-400 billion by the time the final tally is made. Europe cannot afford this and I would not be surprised to see one of the funding countries saying that is it for them which will throw Europe into a tailspin. Effectively there are bank runs underway in both Greece and Spain currently and while no central bank will talk about it and no politician mentions it there is every indication that this is what is taking place each and every day now. It would not surprise me to see the imposition of capital controls and then a new round of havoc will ensue.
In the final analysis it probably all comes down to what price the Germans are willing to pay for dominating Europe. I suspect that when the Germans find themselves with a lower standard of living for paying off everyone else’s debt that the mood in Berlin will become much more somber as the cost of “living the dream” becomes so burdensome that tempers begin to flare. The French and the troubled nations are all calling for a single standard of living really and I just cannot imagine that Germany is ready to undertake that cost without serious consternation. Due to the recession and to the European methodology of counting debt to GDP ratios and to their allowance of “funny accounting” at their banks the downgrades continue, such is in the Netherlands today, and you can see the financial deterioration that is taking place all across Europe. The European Union is sinking under its own weight and it is not only questionable if the Germans and their partners want to pay but if they have the capacity to pay without all of Europe becoming a BBB+ credit if, to quote Chancellor Merkel, “more Europe” actually takes place.
“Enter Stranger, but take heed
Of what awaits the sin of greed
For those who take but do not earn,
Must pay dearly in their turn.
-The Front Doors of Gringott’s Bank