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The Proper Role of Greece?

05/17/2012

Late Tuesday afternoon, my anxiety level with the market rose markedly.  That was when the Greek president announced that almost $900 billion of bank deposits left the country that DAY.

While not always true, a run-on-the-bank is a very strong indicator that big trouble is imminent.  Since January of 2010, total bank deposits in Greece are down a whopping 29%.  Some of that decrease is certainly that the people of Greece are consuming their savings, but the majority is people getting their cash outside of Greece.

If you are a Greek citizens and if you have your Euros in a Greek bank and if Greece is tossed out of the Euro Zone, you will no longer own Euros but will own Drachmas instead.  If you had enough Euros to cover a month’s worth of living expenses before, you might now only have enough Drachmas to live a week, for example.  I’ve seen one computer simulation suggesting the price of gas in Greece will rise to $28 per liter, a crushing “tax” on any economy.  The Greeks are already suffering now, but it will get much worse when they are tossed out.  I feel sorry for them!  They don’t even know how bad it will be.

It was a mistake for the Greek president to make that statement on Tuesday.  On Wednesday, he was careful to say no bank deposits left the country that day, but nobody believes him.  It is a good reminder to keep a finger close to the SELL button.

Of course, the greatest fear is contagion, i.e., that the same sad fate of Greece awaits Spain and Italy.  With political paralysis in Europe (as in the U.S.),  the only hope for Europe is that the European Central Bank (ECB) does for Europe what the Fed has done for America.  Central bankers around the world will be begging the ECB to issue Euro bonds (something Germany opposes strongly) and then engage in quantitative easing.  Euro bonds would backstop the bonds of Spain and Italy, reducing their borrowing costs.

Sometimes, you have to make an example of somebody.  It is time for Europe in general and the ECB in particular to make an example of Greece.  They will not accept austerity.  They will not cut their entitlement programs.  They will not increase taxes.  They will not reduce their regulatory restrictions.  Let them go, sadly let them suffer, but let them terrify the remaining Europeans into accepting greater austerity. 

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