May 5, 2010
The last few days have been great for the shorts. I’m one of them. Global markets have been in an absolute panic over what’s happening in Europe, and many major indices have erased their 2010 gains.
Clearly, the most concerning issue of the day is the ongoing trouble in Greece. The government has been borrowing and spending far beyond its means, and far beyond its growth potential for years. Hell, for decades.
Now the country is going with hat in hand to the European Union and International Monetary Fund (what essentially amounts to the United States) for a bailout. Make no mistake, this absolutely has the potential to break apart the euro zone.
At a minimum, bailing out Greece will require substantial cash infusions in order to get the government running again… quite literally, the Greek government is bankrupt, and it will need a lot of money just to limp along from paycheck to paycheck.
More importantly, however, the EU and IMF will have to step up and guarantee large portions of Greece’s $400+ billion public debt. If they don’t, private investors will be simply unwilling to buy all of the new debt that Greece so desperately needs to issue in order to finance its government for the next several years.
Naturally, if the EU (read: Germany) guarantees Greek debt, it will put 100% of the risk (with 0% upside) squarely on the shoulders of German workers.
Now… let’s go back and reconsider the history of Europe. This is a continent that has been at war with itself, or threatening to go to war with itself, for millennia. If we ignore the Balkan conflicts in the 90s, Europe only has a 20-year experiment of patching things up and playing nice.
I’m not advocating that the continent will once again plunge into destructive warfare… but rather trying to illustrate that the average German worker, who already struggles to give half of his paycheck to the government, doesn’t give a damn about ensuring Greece’s generous entitlement programs.
To give you an example of what I’m talking about, a hairdresser in Greece has the right to retire with full benefits at age 50 because the occupation is one of 580 job categories considered ‘hazardous’.
According to the New York Times, which published a list of these hazardous Greek occupations in March, radio announcers and reed instrument musicians are right up there with coal miners and bomb disposal workers. They all get to retire at 50 or 55.
Needless to say, these entitlement programs suggest that Greece’s financial problems extend far beyond its debt. Total government obligations, including its ridiculous pension program, tally nearly 900% of GDP.
It will be impossible to borrow this amount from private markets, and it is absurd to think that Germany would ever consider guaranteeing such a sum.
This means that Greece will have to make massive, massive cuts to its social welfare programs… and this, after all, is one of the prime conditions of its bailout. Greece is to cut government spending to the bones while simultaneously raising taxes to plug its budget shortfall.
Naturally, this is another stupid idea. Anyone with even most cursory understanding of street-level economics knows that raising taxes provides a disincentive for everyone.
If you raise sales taxes (VAT), you provide a disincentive for consumers to spend… in which case, congratulations, you won’t be able to rely on consumer spending to drive economic growth.
If you raise income tax rates, you leave consumers and businesses with less disposable income to allocate towards investments and purchases which will drive economic growth.
If you raise capital gains taxes, you provide a disincentive for entrepreneurs and investors to take risks that will create jobs and build wealth.
If you raise payroll taxes, you provide a disincentive for employers to hire workers.
You get the idea. Raising taxes is the exact opposite of what Greece should be doing right now… and yet, its politicians are surrounded bureaucratic vultures insisting that the only way out of the crisis is higher taxes.
Now– the other side of the equation, massive cuts to government spending, is laudable. But here’s the problem: Greeks have been paying exorbitant taxes for years. They have been misled for decades that their pension programs would be waiting for them upon retirement.
Now that many Greeks have reached retirement age, suddenly the money that they have been paying into the system for their entire lives is no longer there. And the government is telling the Greek people that they are the ones who need to make sacrifices.
If I had paid hundreds of thousands of euro into a system that had effectively robbed me and left me with nothing, I would be angry too. I would take to the streets too.
That’s exactly what the Greeks are doing now.
If Greece were a private company, the officers and directors would be locked up forever. Politicians, on the other hand, control paramilitary forces which quell the rebellion and shoot a few of their own countrymen.
It’s a disgustingly perverse system, and it deserves to go down in flames.
As I’ve stated before, one of the best ways to play this is to short the euro against gold and silver. I recommended this a few months ago at 760, and gold keeps hitting new, historic highs above 910.
For contrarians, taking a small, speculative bet on Greece right now may be a decent, short-term gamble in the event of a temporary pullback– I know some people who are buying National Bank of Greece (NYSE: NBG), for example.
In the longer-term, though, Greece’s financial problems are clearly unable to be contained, even with EU/IMF support. Afterwards, the continent will have to deal with Spain, Portugal, and Italy… and their problems substantially outweigh those of Greece.
What do you think– would you take to the streets too? I’m curious.