“I’m sorry but this relationship just isn’t working. It’s not me, it’s you.”
The Greek financial crisis continues to dominate the financial press. Last Friday, when the European finance ministers reached a last-second agreement, the Dow Jones Industrial Average rose over 100 points. Monday there started to appear fissures among Greek legislators with some thinking Alexis Tspiras gave too much, causing markets to drop. Then on Tuesday the lenders approved Greece’s plan, and the markets surged. So what is an investor to make out of all of this? In this post, I’m going to break down what I think will happen and how that will affect us as investors (as always, this is just my opinion and I am not guaranteeing the future).
As I said in my Feb 13 weekly review, there are broadly three options on how this situation can play out:
- Greece uses the loans as a bridge to reforming its economy so it can reestablish itself as a self-sustaining country which can support itself without foreign intervention.
- Germany and the European community continues to subsidize the Greeks in spite of their failure to drive the sufficient reforms necessary to become fiscally solvent.
- Germany and Greece don’t agree, Greece defaults on its debt package, and they will ultimately leave the Eurozone–Grexit.
The first option—Greece stands on its own—is the one everyone has been hoping for, and really the reason for all the effort in the first place. Yet, it also seems incredibly unlikely. Greece spends too much money and it takes in too little in taxes. Their pension system is incredibly generous and expensive; some estimate that last year 40% of the people who started collecting pensions were below the official retirement age. Their public sector is enormous and inefficient, and their tax system is corrupt and totally ineffective with so many loopholes it reminds you of Swiss cheese (thank you, I’ll be here all week). But most damning is they just aren’t very productive. Quick, name a product that is made in Greece that you’d want to buy. Not easy to do.
Put all that together and it’s a total recipe for disaster that has led us to where we are. That’s not to say a country can’t dig itself out of this hole with the proper motivation and a willingness to sacrifice–Ireland comes to mind as a country in a similar place that has started down the slow, long, painful path to recovery–but the Greeks seem to have neither. Just a month ago they elected a prime minister who ran on the platform that he would repeal all the austerity and reform measures that were imposed on Greece to get them back to self-sufficiency.
If Greece were able to pull this off, then it would be a huge boost to all the stock markets, especially the European markets, and most especially the Greek markets. But I just don’t think the Greeks have it in them. I hope they prove me wrong.
The second option—Greece continues to get loans without meaningfully improving—seems to be where we have been for a while now. If you accept the reality that Greece will never be able to right itself, then this seems like the best option except for ONE MAJOR PROBLEM—eventually the Germans and the rest of Europe will get tired of subsidizing Greece’s reckless spending problems. And by the looks of it, “eventually” might be soon. Just like the parents of their 26-year-old, unemployed son living in the basement are one day going to say “enough is enough” so that will happen with the Germans and the Greeks.
So long as the loans keep coming, Greece has shown very little motivation to make the hard choices to get better. Remember in 2012 when Tspiras and his Syzria party first started making waves, he basically was calling Germany’s bluff, saying that the loans would continue even if Greece rolled back the reforms because no one was willing to kick Greece out of the Eurozone. Incidentally, isn’t that just a massive “screw you” he gave to the Germans?
This whole drama started 7 years ago and has Greece been able to fix its problems in that time . . . no. Germany and others continue to lend money which creates a drag on their economies and lowers their stock markets, while Greece takes the money and fritters it away. Believe me, I would love to be partying all the time while someone else pays the tab, but life isn’t like that. If we continue down this path, I would expect returns from European markets to continue to be lower than those in the US, as has been the case for the last five years.
The third option—Greece leaves the Eurozone—seems to be eventually where we end up once Germany cuts up Greece’s credit card–Grexit. Since no country has ever left the Eurozone, no one really knows what will happen. People with a vested interested in keeping the status quo use scaremonger tactics to paint a picture of economic catastrophe if this happens. But what would really happen if Greece left the Eurozone? Here’s my take:
Undeniably, it would be bad for Greece and anyone investing in Greek stocks, really bad. They’d have to introduce their own currency which would start trading against the Euro, and because of the shambles of the Greek economy it would depreciate rapidly. Greece would experience huge inflation and imports would become much more expensive which would have a huge negative effect on the quality of life for the Greek people. Also, when they went to borrow money internationally, their past track record would make it so they would only be able to do so at interest rates much, MUCH higher than they are getting now from the subsidized loans from Europe. Greece would tumble into a huge recession that would make the past five years look like a day at Mykonos (again, I’ll be here all week). After many, many years, things would start to normalize but Greece would be firmly entrenched in the ranks of a 3rd world economy rather than a peer among Europeans. That would really suck if you were Greek.
The major unknown is what would happen to the other European countries in the Eurozone. Probably for a little bit it would be rough sailing just because the maneuver of a country exiting the common currency has never been done before, but what would really change over the long-term? Would Seimen’s x-ray machines (Germany) be any less accurate; would Heinekens (Netherlands) taste any less good; would Michelin tires (France) be any less durable; would Ferraris (Italy) be any less of a status symbol? No, they’d all maintain their competitive positions, continue to sell, and maintain the value of their stocks. After the brief hiccup when Greece leaves and things get settled, the European economies would probably be even stronger because they wouldn’t be dragging Greece along with them. Sure, their imports to Greece would be hurt, but remember the Eurozone is about the size of the US economy while Greece’s economy is about the size of Connecticut’s; not a huge deal in the grand scheme of things. I would predict that within two years (and probably even less), the European stock markets would be higher than they would on the day of Grexit.
As far as the rest of us go, the whole Greek saga really has no bearing. As I mentioned before Greece is tiny in terms of its economy. If/when Greece exits the Eurozone and its economy implodes it will go unnoticed except by our news organizations which are going to have to find something else to talk about, but that’s really it. In fact, because Grexit will be good for Europe, it will benefit the other global economies just because we will have a healthier and stronger Europe to work with.
So there you have it. That’s my take. The sooner we face reality, the sooner we accept that Greece just isn’t capable/willing to support itself, the sooner we’ll be able to move forward. And that moving forward will help all our economies and be positive for the stock market.