July 13, 2011
I went to dinner last night in an upmarket area of Thessaloniki. It wasn’t a touristy part of town at all, nearly everyone there was local.
As we walked down a narrow cobblestone path flanked by traditional Greek restaurants, all the various hostesses and proprietors ran out to greet us and pitch their menus.
“We have the freshest seafood!”
“We have the cheapest prices!”
“We offer free drinks and dessert!”
Within seconds, outright calamity ensued with each thrusting menus in our faces, pulling at our shirtsleeves, and shouting over the competition. Then a shoving match… and then finally an all out physical altercation, literally coming to blows over what amounted to a $20 dinner tab.
Now, aggressive behavior is common in this part of the world; it gets even worse in Turkey and North Africa. But there is an element of desperation that I have not yet seen before here. Given the graveyard of former restaurants gone bust nearby, it’s clear that last night’s owners are trying to stay afloat at any cost.
Later in the evening, I dropped by the city’s ancient agora ruins. Inside I could see a number of stray dogs marking their territory as they saw fit, and it was the perfect metaphor. This place has literally gone to the dogs.
Coincidentally, the Greek government held a ‘successful’ bond auction yesterday, unloading 1.6 billion euros of six-month bills. This sounds like a lot of money until you figure that it just barely covers this month’s interest payments on the roughly 340 billion euro debt that they already owe.
Just last month alone, the Greek budget deficit was 2.2 billion euros. Greece must continue indebting itself not only to make interest payments, but simply to keep the lights on. Meanwhile, the principal balance owed keeps rising while tax revenues are falling… making the situation perpetually worse.
Bailouts can’t fix this problem. Think about it like this: say your best friend is swimming in debt, paying $5,000 per month in interest. His best job prospect is $1,000 per month, so he’s in the hole $4,000 per month and rising.
If he receives a new $10,000 line of credit, would this fix his problems? Not at all. He’d be staring at bankruptcy again within 3-months.
Living bailout to bailout while going deeper into debt is simply an unsustainable Ponzi scheme. And given the Greek government’s current cash position and bond auction calendar, the next do-or-die bailout should come to a head this summer.
Europe will have to make a decision: (a) continue financing Greek largess and hope that taxpayers don’t care or notice; (b) take cover and allow the Greek government to default; or (c) an ‘orderly restructuring’ that combines loan workouts, haircuts for bondholders, and strings-attached cash injections from the ECB and IMF.
The most likely is the third option, but no matter how you dress it up, it’s still a default.
We’ve seen this play out once before in Dubai. The emirate underwent a steep restructuring period on roughly 50% of its $59 billion debt load in late 2009 and 2010, and it caused a deep recession and losses in the local market. Two big differences, though.
First, Dubai had a wealthy big brother in Abu Dhabi. Europe has angry German taxpayers.
Second, Dubai was isolated. Europe has a number of insolvent countries whose collective debts far exceed the capacity for any bailout.
If the market is allowed to function, the consequent derivatives chain reaction from default will cause a wave of bankruptcies among a number of large financial institutions, triggering even more government intervention (read: taxpayer bailouts) and a deflationary sell-off in financial markets.
Barring a miraculous, no-strings-attached emergency bailout, I think we can expect the opening salvos within the next few months.
So why should you care if you’re not Greek? Because the ensuing capital controls, raids on public and private pensions, and social chaos met with overwhelming police brutality will be a preview of things to come when the rest of Europe and the United States arrive at their financial reckoning days.