Sunday, August 23, 2015

GREECE AND THE EURO - TAKE TWO

OK. Let's revue.

A couple of weeks ago, I predicted that the Europeans understood that a major portion of the Greek debt was going to have to be forgiven, that European banks would have to begin printing money if they wished to make the holders of Greek debt whole, and the Euro would hold at its floor of $1.10 or thereabouts given that such a result had already been figured into its value.

It now appears that the Germans have convinced the Troika (the EU, European Central Bank, and International Monetary Fund) to hold firm and require that Greek debt be honored in full by Greece by itself, that the money to do so could be squeezed out of a Greek economy that would grow in spite of harsh austerity measures imposed by the EU, and as a result of that (and other factors) the Euro has popped up by about 3% against the US dollar.

Was I wrong? No. My timing was just a bit off.

The idea that the Greek economy can grow sufficiently to pay off its debt is simply ludicrous, whether it succeeds in restructuring the public and private sectors of its economy or resorts to the practice of sacrificing virgins. The idea goes beyond ludicrous and approaches insanity...insisting that what has not worked in the past will somehow become the solution in the future. Cynically kicking the can down the road, extending the terms of bad loans to a bankrupt government that has no hope of repaying them, will only heighten the crisis. Eventually, a combination of private and government investors will have to take a hit. Given the apparent reluctance to simply write off a portion of the debt, that hit will probably be in the form of receiving their payoff in Euros of reduced value. The European Central Bank will have to print Euros, whether Merkel likes it or not.

And Portugal, Italy, and Spain are still watching. They would be the next dominoes to fall in a Europe that makes austerity the only tool that it's willing to pull out of its toolbox to counter sovereign debt. I cannot believe that Germany would be willing to see the entire Mediterranean tier of states leave the EU for the sake of adherence to the primacy of the single economic principle of austerity. (The United States has pretty much debunked the primacy of austerity with the relative success of its stimulus. In doing so, it began outgrowing Europe early on and continues to do so.)

And the Euro? I think that its current rise is temporary and related more than anything else to the retrenchment taking place in the international equities markets. Currencies have become more attractive than equities for the moment and, for those who like currencies, the Euro is cheap. But being cheap is not a strength when it comes to currencies. Exactly the opposite. The Euro is cheap because the underlying European economy is still questionable. So $1.10 remains a reasonable long-term price for the Euro.

Could par with the dollar be looming for the Euro? I wouldn't have thought so just a few weeks ago. Now, even given the Euro's current rise in value, I'm not so certain.

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