LAMENTATIONS OF GREECE

“Frustrated with Greece’s inability to meet two years of targets for cutting the deficit and selling off state assets, donor countries are also insisting on more control over how Greece spends the money” screamed a recent prominent news item in the recent days (source bloomberg.com)

It is a very uneasy feeling when creditors breathe down the neck . In the case of companies, the owners suffer while the employees look for alternatives. If the company is large and/or the owners are smart they stack away most of their wealth beyond the reach of creditors.

But when countries are indebted, then the population suffers. In the case of Greece, the common currency has created a new kind of “financial apartheid”. The steps taken are plunging Greece into further indebtedness & discomfort. In fact the decisions are not taken for the benefit of Greece; but for France. To save French banks, Greeks suffer.

By 2020, the Greece debt/GDP ratio will exceed 135%.

Greece is in permanent recession ever since it declared in 2008 that its debt/GDP ratio is 120%.  Now the headlines say that by 2020 this ratio will be 129%! Greece is the only economy that registered a decline of 7% during 2011, when most other economies recorded better growth rates. By 2020, the Greece debt/GDP ratio will exceed 135%, if the economic decline at 7% continues!! The way the ECB and other fellow Eurozone nations treat Greece, that is bound to happen !!

Coming back, what are the negotiators doing? All the so called cuts are sham. There are reports that ECB bought the Bonds of Greece at deep discounts and now wants the value almost at par! Remember this is the European Central Bank and the equivalent of Fed Reserve. Can you imagine Fed Reserve is trying to make money out of the misfortune of a US State?

Currency Union without Political Union is the Joke of the Century

California was a bankrupt state in the US post 2008 Financial Crisis. Since political union and economic union was same, California got breathing space. However, the smaller and weak country like Greece is being stifled by larger players of Europe.

Taking a bold decision, by 2020, the Greece debt/GDP ratio will drop below 90%.

A better option is to follow Argentina of 2001. Possibly, a default in unavoidable!. But the choice of its former currency ‘drachma’ gives Greece much needed economic freedom to devaluate it to such a level where its exports become cheaper! Tourists will flock into the historic and beautiful country, its exports will shoot up in such a manner that the GDP will grow soon. Like Argentina it will be back to normal - by2020. And it will not be saddled with debt and low growth that will make its debt/GDP ratio 129%.

If Greece gets out of Euro by 2020, its debt/GDP level will much better position to the envy of Spain and other countries who still allow their monetary policy hijacked by those in Brussels, Paris and Berlin.

Greece should take a bold decision – Get out of EURO!

Will 2012 be similar to 1932? Or Japan in 1990s ? - Part 3

During Oct 2010, Financial Thoughts was concerned whether 2012 will be similar to 1932.

Well, what was the situation in 1932? Gloomier than in 1928/29 when the Great Crash happened in the US. In 1932, the stock markets touched the lowest level, below 1928 (or 1929) crash levels. The US economic conditions deteriorated and the unemployment level reached 25% in 1932. We discussed about the parallels between 1929 Crash and 2009 Crash and discussed some of the common reasons behind downturns i.e. - the structural weaknesses, reckless lending, high leverage, speculation, asset bubbles, massive bank failures, stock market crash, etc. were some of them.

We had also discussed about the parallels of 2009 Crash to the Collapse of Japanese economy after their fantastic economic growth in the 1970s and 1980s, where Japan witnessed fast rise in real estate, stock market and all asset classes fuelled by cheap credit policy. But mainly due to mismanagement of the interest policy regime, the stock market crashed, debt crisis followed, banks collapsed, triggering bailouts by Japanese Govt, which sound so similar to the US story of 2008 end/early 2009.

As we have just begun 2012, it makes worth a look into the comparison to 1932. . Despite the risks of Euro Crisis, which may lead to Greece default  or some countries quitting Euro can create 'neo-Lehman' situation, as we stand today, it is highly unlikely that 1932 will get repeated in 2012.

Financial thoughts salute Ben Bernanke for taking actions that prevented a repeat of 1932. In USA unemployment has dropped below 9% instead of shooting up to 25% as in 1932. The consumers still spend unlike in 1932, when consumer spending dropped due to deleveraging, unemployment, erosion in networth due to fall in asset values, traceable to the stock market crash / real estate crash of 1928/29. Lower consumer spending meant lower demand for goods and services. Business dropped leading to more shutdowns and more unemployment, which reached 25% in early 1930s. Stock market crashed below 1929 levels.

Clearly, this is avoided.  (Let us take a sigh of relief - for now)

Taking a great risk of fueling asset bubbles, destabilizing prices and eroding the value of the dollar, Bernanke launched a series of Quantitative easing after lowering the fed rates to 0.25%. The risk taking paid off as US avoided another 1932! US was fortunate to have a student of 1928 Crash (Ben took the PhD on this topic) as the Fed governor. Ben fought against the threat of deflation like the Highland Scots in the battle of waterloo!  (It is pertinent to note that linked to gold standard, the dollar printing was restricted and US Govt/Fed did not inject liquidity into the economy in 1930s. International trade had dropped due to protectionism. Overall, the deflation set in causing drop in prices, translating into losses for businesses, that managed to survive the Crash. More unemployment. Fed kept interest rates were high. All of the above ensured the recession continued into a decade.)

Of course, the world also acted together. The world leaders met couple of times and avoided the foolishness of too much protectionism.

So far so good!

However, the risks remain. Risks are quintessential. It never goes away. It regenerates in new forms!

1. US economy has shown improvement, but that it is agreed that the pace is slow. Many critics point out that the US economy is artificially popped up with liquidity. It is like a patient on oxygen.

2. Europe debt crisis has not gone away. Greece is still struggling even after some write offs have been agreed. Euro crisis is a political mess in as much as Germany wants to impose austerity on Greece. The effect is that while German standard of living continues to improve, Greece suffers. Portugal and Italy may re-emerge with more debt surprises.

3. USA's rising debt (nearly USD 16 trillion), which is more than 90% of US GDP is considered by many as a huge risk. Historically, debt level above 90% GDP has been seen as a drag on growth.

4. Huge US deficits are a challenge for any future US government. As critics say, a portion of the recovery was possible because of the borrowing from the future generation.

5. Although unemployment improved, there is still a long way to go before the labour market achieve normalcy. Due to losses suffered from the stock/ real estate market crash, many Americans are still struggling to meet both ends meet. Retirees have come out of retirement and still doing two jobs! Young men get frustrated and start protests such as 'Occupy Wall Street' movement.

What this mean to investors? Well Be on Guard. Your hard earned money could be under attack. Remember the best two principles of Warren Buffet (a) Never lose money in investments/savings (b) Always remember the first rule. It is a tough job; but very little alternatives.