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Monday, September 19, 2011

Musings on Greece and Euro Zone's Problems

As for me, all I know is that I know nothing.  Socrates

On 9/11 last week, I spent much of the day, like many Americans,  watching footage of the terrorist attacks.  One of the things that really struck me more than it had in the past was the giving of advice by those supposedly "in the know" that cost thousands of lives.  People in the towers called 911 after the first plane hit and were told to stay put--that help was on the way.  Others were directed to go to the roof.  The people who supposedly knew how to respond to a crisis had no idea of what was taking place.  Yet they didn't hesitate to tell  people to stay in their offices as smoke and fire filled the room.  They said help was on the way.  Many times we assume that those in charge know what they are doing.  People in the World Trade Center towers did, and it cost them their lives.

Often times in the financial arena, observers believe those in charge know what's going on.  In 2006, we listened as Greenspan and Bernanke claimed the housing crisis wouldn't have a major macro economic impact.  Today, Sarkozy and Merkel and, for that matter, the world's central banks have center stage.

Added into this is the obvious fact that those in charge have to parrot the party line.  A good example comes from the world of sports.  Reporters corner players after a string of losses and ask them how the team is doing.  Their response is predictable.  They talk about taking the season one day at a time, practicing harder, being professional, blah, blah, blah.  They'll never say the truth--that in fact the team is freaking out and the players have lost confidence in the coaches and prima-donnas have destroyed team unity.

Speculative activity enhances volatility and compresses the time frame.  In 1992, Soros made a huge bet against the pound sterling and made over $1 billion when the devaluation occurred.  Today Soros wannabees have put on huge bets against the euro, as reported by the Commodity Futures Trading Commission.  A point to ponder is that today this speculative bet is considerably easier to put in place. Practically anyone can buy the  EUO exchange traded fund - the Proshares UltraShort exchange traded fund.  There has to be some undiscovered law in finance that says the probability of a major financial accident increases as the ability to make leveraged bets becomes more widely available.

Europe is losing dollars as U.S. money funds are moving funds out.  The dollar, of course, is the world's reserve currency; and it can be supplied by running the printing press.  This the Fed has committed to do along with other central banks in 3 liquidity operations.  Still, the major forecasters are predicting a fall in the euro through year end and into 2011.  Credit default swap rates are up sharply, and the yield on 2-year Greek debt climbed to 80% at one point.  The major confusion surrounds the impact of Greece potentially leaving the European Union.

The situation is similar to a family where most members are financially responsible but one consistently runs up the credit card and requires others to bail them out and refuses to become financially responsible. The responsible members have lent money to the problem member and can't decide if "toughlove" is appropriate or if continual bailout and hope is the right course.  Greece's debt is 140% of its economy.

On the truth-telling issue, it is extremely disconcerting when the leaders claim the $440 billion euro European Financial Stability Facility (EFSF) is large enough to buy debt as needed during the crisis when, in fact, every expert has said that this isn't the case. 

Adding insult to injury, economic growth in the Euro Zone is weakening.  Economic growth can solve a lot of problems.  Unfortunately, it isn't happening here.


  1. Sometimes I wish Greece would just default, withdraw from the EU and get the pain behind us. The EU needs to take it's stand saving Italy.

  2. I as well Grouch think we should get it over with already. If each European country is going to take years of volatility and uncertainty before the obvious end result, we could be sitting on 2 decades of this type of market!

  3. I don't think the EU has any special love towards Greece. It is purely a decision of what will be more costly - bailing out Greece or *not* bailing out Greece.

  4. Interesting point Grouch; it's the equivocation that's the real problem.