I don’t want to rain on anyone’s parade, but we all know that the Greek budget crisis hasn’t been resolved, right? It’s merely been postponed until April and May.
That’s when Greece has to refinance $27 billion in debt. (Doesn’t seem like much? Well, if you scaled that number up to reflect the difference in size between the Greek economy (an estimated $340 billion in GDP, according to the CIA World Factbook) and the U.S. economy ($14.3 trillion in 2009), Greece would be looking at the need to refinance $1.1 trillion in debt in just two months. (Tells you why there is a Greek budget crisis, doesn’t it?)
So far all that’s really happened in the way of a fix is that the Greek government has promised to deliver an austerity budget that would cut the budget deficit from 12.7% of GDP in 2009 to 3% of GDP by 2013 and that European Union governments have delivered vague promises to do something if Greece gets in rally deep trouble..
There’s good reason to believe that those budget cuts just aren’t going to happen.
(And given Greece’s history of providing bogus budget figures to the European Union, there’s no reason to put much faith in these promises. For more on that history see my post https://jubakpicks.com/2010/03/09/the-lesson-of-the-greek-crisis-everybody-government-cheats-and-no-one-wants-to-know/ )
Not only is the public sector the target of most of the cuts, but it also provides 40% of the country’s jobs. That means any budget cuts stand a good chance of sending the country’s economy into a tailspin. Falling economic activity would reduce government revenues, increase the budget deficit again, and create the need for even more cuts. The Greek government has already reduced its forecast for economic growth in 2010 to a negative 2% from a prior negative 0.3%.
The European Union promises of help are so vague that the bond market is likely to see right through them come the Greek refinancing in April and May. That’s likely to push up the interest rates Greece has to offer to refinance its debt. Which, of course, will add to the budget deficit.
I think there’s a good chance the Greek crisis will return to TV screens near you just in time for the summer re-run season.
I do not see another way out of this mess, than letting Greece leave the Euro zone and then devalue, or letting the value of the Euro go down vis a vis £, yuan, £ even, and perhaps, to rephrase the words of one of your politicians of old, say: the Euro, our money, your problem.
Oh, and I think it’s a little crazy to compare California’s economy and prospects for recovery to someplace like Greece. It’s like comparing the Car of the Juggernaut to a Krishna devotee under its wheels (which image was a British falsehood, by the way).
Let them eat olives! Other than having a position in EUO to play short the Euro a little bit, I’m not at all sure why I should care about the PIIGS. They’re not really big enough to make much of a dent in the world economy. So what? Italy, for example, are we saying Ferrari and Maseratti are going to price themselves out of the market? Will all the prospective 65 year old mothers have to go someplace else to get their embryo implants? You can’t overprice an item that most people don’t want or need.
So, I assume the EUR/USD will reverse its recent upward climb? Wondering how low the EUR will fall. ALso, after playing with VXX and getting crushed, I was wondering how low that ETF could actually go. Thats a terrible foolish way to hedge or short the market. I wouldn’t messs with that.
Jim and Ed, thanks for the comments.
I still think there are some parallels to California’s relationship to US in the Greek relationship to ECM. Obviously very great differences too.
But as Jim pointed out, the Greeks can’t deflate their currency to solve their debt problem- neither can California. Greece must compete with other Euro denominated sovereign debt, thus will pay higher interest rates on its bonds. At a high enough coupon rate, someone will buy them. Same with California relative to other municipal or tax exempt bond issuers.
Greece has too many government workers for the size of its tax receipts- so does California. Neither can’t print currency to solve the problem. Tax increases are generally as popular as a skunk in a parlor pretty much everywhere- particularly in California. So that leaves job and wage cuts as the fashionable choice. That’s happening in California right now, and it is ugly.
As Jim notes, the path to decreasing the size of the deficit will be to cut government workers or cut their wages in Greece, with no commensurate increase in the competitiveness of Greek products around the world. Same in california. Our products- missles, ag, movies, apple phones, etc- are not made more cost competitive becuase California government workers are going to lose their jobs and have their pay cut. But it sure makes interfacing with the government a lot more difficult, costly and time-consuming.
And all of this will be hitting the economy just as its fragile recovery is taking root. Less salaries = less income tax receipts = more budget imbalances = more need to cut salaries and it starts all over again.
Governments can’t cut jobs and wages quick enough when times are tough and tax receipts fall quickly and dramatically. And they’re cutting at about the worst time relative to non-government economic activity.
Greece and California sound remarkably similar, with remarkably intractable problems.
southof8,
The problem with playing volatility is the nature of the volatility. In the case of Greece, I would normally take the short European equities strategy. Unfortunately, investors who were leaving because of Greece haven’t exactly thrown their money back in.
I’m also not sure about shorting the euro, unless the EU tries to bail out Greece by printing more money. So far, that hasn’t been proposed.
Is Greece leaving the EU? The markets might over-react initially, but then they’d realize the world didn’t end, and return to business as usual. Greece just doesn’t carry that much weight in international trade. As for the EU, they’d be better off without Greece (I suspect they know that already, and are hoping Greece asks for a divorce).
Jim,
Do you think that we should get into considerable cash position considering Greek’s budget problems, and the fact that we might not see too many new jobs in March?
As per your posts it looks like markets might be heading for a correction. My guess is Market might drop 10% or so by April mid.. What do you think?
Time to consider taking a vacation in the greek isles that I always wanted.
Jim,
Sounds like you’re dubious about any Greek bailout. If Greece isn’t helped, do you think they will be forced out of the European Union? Also, in your opinion, what are the implications for the global economy and the euro?
southof8 There are reasons why the public sector provides 40% of the jobs in Greece. The companies that produce the little that the country produces that consumers in Greece and elsewhere want to buy are high cost producers because Greek industry isn’t very efficient and costs are high. (You really can’t keep increasing wages when productivity isn’t increasing.) The euro is part of the problem (only part) in that it removes the one traditiional way out of this problem–depreciate your currency until your products get cheap enough to sell. This, just like budget cuts, hurts Greeks who see their living standards fall. But unlike budget cuts depreciating a currency can give an economy a route to future growth. Cutting 20% of wavges for government employees makes Greek products more competitive around the world how?
thanks Ed; that is just the information I was looking for.
Any strategy for playing increased volatility over the next weeks or months?
southof8,
Stay away from VXX (which tracks the VIX). There are too many times it moves in the opposite direction from the VIX.
Is there an etf or the like which tracks the vix that one can purchase?
Is the correlation to the vix strong, or is it like UNG’s correlation to natural gas prices (i.e., not so strong).
Thanks for any input.
I mostly agree that the Euro is in deep trouble but Axel Merk (who definitely has relatives hiding in Argentina) makes an interesting case for future strength of the Euro
http://finance.yahoo.com/tech-ticker/%22the-dollar-is-going-to-suffer%22-axel-merk-makes-the-bull-case-for-the-euro-443789.html?tickers=UUP,GLD,UDN,TBT,MERKX,EUO,VGK&sec=topStories&pos=9&asset=&ccode=
Well, what do you expect from a nation which has 40% of it’s jobs come from the government sector !
Gezz…
When everybody jumps into the wagon, and there is no lone left to pull it, the wagon stops.
I guess the big question is what does this have to do with the global economy?
Answ: Probably nothing. But, if the greek economy is going down now, Italy next, then Spain, then ireland… Then UK, next USA…
After that China’s bubble, and then their banks…
Boy does that analysis bode poorly for the USA and California, where budget cutting is eliminating public sector jobs at a time when the state’s coffers are bringing in 80% of the revenue the last few years.
More job cuts = more weakness = more budget woes= more job cuts = ugly. When the Hooverites in Congress convince the country that we need to start cutting jobs and cutting spending on the federal level, the snowball’s gonna get bigger.
Jim, last spring right before being booted off the air, you mentioned when a bear market give you a rally, you sell and say thank you.
Thank you.
I second your analysis Jim.
A very good call. I know of some very smart people who continue to short the Euro.