From John Taylor, Chief Investment Officer Of FX Concepts
Open Letter To Greece
Get out Greece! Get out right now! You should have moved two years ago; you missed that chance, but now it is much better than later. Summer vacations are being planned while we speak, you must move fast to get the biggest advantage out of bolting from the euro. Don’t let the next global recession bare its teeth. Investors still have money and they are interested in buying your assets when the prices are knocked down – each day you wait their value is deteriorating and you are looking more desperate.
Most important: don’t listen to the naysayers in Brussels who are warning you of disaster outside of the ‘protective euro blanket.’ It’s much better outside, even the Turks know this. Do pay attention to Angela Merkel and Wolfgang Schäuble; they are telling you the truth – there is no hope within the euro. Even though the latest German plan to take away your financial freedom has been blocked, the PSI deal is almost as toxic. We read in the press that about 94% of your government debt is written under Greek law, which means you have control over it, but after the deal with the private creditors is signed all of this debt will be written under British law. Your parliament and your judges will be insignificant.
Right now you have control over the currency of your debt, like any real country, but after the PSI you will become no more than a province of the greater Eurozone, unable to modify your debt. Whether it is Brussels, Berlin, Washington or London that is calling the shots, you can be sure that after these negotiations and the next tranche from the Troika is in place, Athens will be powerless. Right now you have the power to lessen the debt burden by jumping the euro ship and valuing the new drachma at something like 50% of the current euro value. By doing this you have marked down the private sector and the public sector debt holders – this is a great advantage without even defaulting on those 94% written under Greek law. Don’t be shy, value the drachma aggressively lower, below where you think it should be, and then peg it. Euros will circulate together with the new drachma for a few days but Gresham’s Law guarantees that won’t last for long. When the euros are gone, drop the peg. The financial system will be a mess and the banks will be totally bankrupt. However, they are acting as if they already are, not making loans or assisting the economy in any way, so you won’t be losing too much, and you’re going to nationalize the banks anyway. It would be wonderful if the ECB helped out by supporting the new drachma for a year or so, but don’t count on it, as the Eurozone is in too much trouble to help. Remember, first one out is the winner and the pressure will shift to those remaining.
The self-serving cacophony from Euro-officials and Eurozone politicians arguing that you will be far worse outside the euro than in it are only promoting their own interests – not yours. For the last decade, Greece has been a great place to sell products, and Greece has been less and less a competitor in the marketplace as it was priced out of Europe. They’ve been making a fortune while Greek manufacturing has collapsed. Most important, Greece has been priced out of the vacation market. Aegean bound visitors now head to Turkey and on the Adriatic side they go to Croatia. With the new drachma dropping prices, TUI, Thomson Travel, and the other package vacation outfits will flock to your beaches setting off a boom. The negative side is that BMWs will be very expensive, as will all other imported items, so there will be some deprivation and inflation. Although there will be aggressive wage demands, you don’t have to give in. You will be free again to choose your course.
The standard of living will drop for everyone, but the offset is that tourism will come to life, manufacturing will be profitable again and the real estate market will be humming. All of a sudden, Greece will be a country where it is possible to make a living. Turkey has been locked out of Europe and has had a great time.