Trying to Understand Greece

It's hard to understand why someone would try to pull a foot off the brakes of a car careening towards a cliff.  That's the puzzle facing investors as they get the latest news out of the European Union on Greece's call for a referendum on last week's agreement.  Some people and nations make agreements and then live up to the agreements.  Some don't.  A useful source for understanding Greece, as well as the overall European crisis better, is Michael Lewis' readable and entertaining book Boomerang.   I quote from page 47:

"...in October 2009, the Greek government had estimated its 2009 budget deficit at 3.7 percent.  Two weeks later that number was revised upward, to 12.5 percent, and actually turned out to be nearly 14 percent.  He (talking about Papaconstaninou - the new finance minister) was the man whose job it had been to figure out and explain to the world why, "The second day on the job I had to call a meeting to look at the budget," he says. "I gathered everyone from the general accounting office, and we started, like, this discovery process."  Each day they discovered some incredible omission. A pension debit of a billion dollars every year somehow remained off the government's books, where everyone pretended it did not exist, even though the government paid it; the hole in the pension plan for the self employed was not the 300 million euros they had assumed but 1.1 billion euros, and so on, "At the end of each day I would say, "Okay guys, is this all?"  And they would say, "Yeah". The next morning there would be this little hand rising in the back of the room: "Actually, Minister, there's this other one-hundred-to-two hundred-million-euro gap."

That's the cost side.  Then there's revenue.  Tax collection in Greece would probably make even Grover Norquist take pause.  Lewis talks to a tax collector "...an estimated two-thirds of Greek doctors reported incomes under 12,000 euros a year - which meant, because incomes below that amount weren't taxable, that even plastic surgeons making millions a year paid no tax at all."
"If the law was enforced ," the tax collector said, "every doctor in Greece would be in jail."

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.