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Another Old-Fashioned Greek Tragedy

05/29/2011

A year ago, Greece narrowly avoided bankruptcy with a $156 billion bailout from the EU and IMF.  The funds would be paid in various tranches as certain improvements were made in the Greek financial position.  Since then, they have successfully cut their annual deficit by a third, to only 10.5% of budget.  During this process, many thousands of protesters have taken to the streets, even leaving some deaths in the wake.

The opposition party is seizing the opportunity to oppose the government, who must enact even more austerity measures to qualify for the next tranche of bailout funds.  (It also raises the long-running question of whether democracies are equipped to govern during a crisis.)

If Greece tried to issue new bonds, they would have to pay 14-16%, close to credit card balances.  They must have the next tranche of bailout funds.  Greece has already issued about $300 billion in bonds and needs the bailout to keep paying interest and retiring the bonds that are maturing.  At the same time, it is estimated that the Greek government owns about $300 billion in land and actual operating businesses, not to mention tourism attractions.  It seems logical to sell assets or privatize them to reduce the outstanding bonds.  The opposing party is naturally opposed to this.

Ironically, the oldest democracy is also crippled by the same triad of economic philosophies as the largest democracy.  The governing party is normally Keynesian but is trying to implement Austrian (Tough Love balanced budget) economics.  The opposition party is normally Austrian and insists upon tax cuts (Supply Side economics).  As in the U.S., this paralysis is crippling.

Does it really matter?  The GDP of Greece is only about the same as Michigan.  The PIG nations of Portugal, Ireland, and Greece have a combined GDP roughly equivalent to that of Florida.  Could the U.S. survive without Michigan or even Florida?  Sure, but there would still be a huge cost.  The European Union will also survive if Greece defaults, but God only knows what will happen inside Greece.  It won’t be good in the short term.  For the European Union, their borrowing costs would increase modestly, because the Greek bonds were denominated in Euros, instead of Drachmas.

But, if Greece leaves the European Union, what about Ireland or Portugal?  If membership in the EU actually means financial integrity, the EU’s borrowing rates will go back down after all the weaker members are excused.  Will the demand for the Euro fall?  Yes, but it will reset rather quickly, based on a reduced level of demand for Euros in the then reduced EU.

Given the punishment the European stock markets have suffered over the last few years, I do like the European phone companies and other utilities as income producing investments that have the possibility of capital gains as well.

The opportunity I’m searching for is that company or fund that will buy up Greek assets on the cheap that are being privatized . . . let me know what you find!!

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