As events have unfolded these past few months it has been clear to quite a few market commentators that the issues surrounding the fate of the EuroZone, the fate of the Euro, the fate of the G word (did anyone say 'growth'? what growth?), indeed the fate of capitalism in Europe following a century when there were 2 world wars is likely to be severely tested in the coming months.
The battle between left and right, left of centre and right of centre, and combinations thereon, are NOT the real issues here. Granted, the recent success of Franky Hollande in France and the rise of the left in Greece has certainly increased the tension between socialist ideaology and free-market capitalism but this is really a side show to the real problems.
Most people on Wall Street or other financial centres realise that this really is a numbers game and until the politicians start taking guidance from the markets then these tensions will persist to a possible armageddon outcome. In any event the future for the price of Gold looks supremely rosy, possibly supremely sparkling.
Today markets are faced with G8+2 = G10 (see earlier post) and possibly a few others trying to either provide damage limitation in the event of a Greek bailout (number anyone?) again or even greater damage limitation in the event of a Greek default. In either event what is quite clear is that Greece is in no position to service any form of debt, interest, instrument, roll-over of bonds, derivatives nor indeed anything as it appears to be in an unholy mess. Structurally Athens resembles a financial and fiscal armageddon. Any wealth has already exited in the direction of swiss banks, London real estate, a few greek registered tankers scattering towards the new world leaving the people in a state of confusion, bewilderment, frustration, repression and depression. There are no solutions to the Greek debt crisis simply because there are just too many opposing vested interests. An example is the estimated $100bn derivatives exposure; if Greece defaults then the counterparties, JPMorgan, Goldman Sachs, european banks, global banks, sovereign states, etc would receive an horrendous jolt leaving Wall Street nursing severe losses in equities and bonds. I could easily see a NO BID free markets scenario unfold which would make the '29 crash look like a walk in the park.
A return to the Drachma is one (only?) solution but too many other commentators are fixated on the fall out for creditors. I'm not sure that many have taken on board the full extent of the Greek tragedy here. It is necessary for Greece to start with a total clean sheet whether the ECB, G8+2 = G10, etc create some sort of orderly (in reality there's little chance of anything orderly occurring because markets will pick at the weaknesses in the process) bailout or if Greece chooses to exit either in an orderly or disorderly fashion (the most likely scenario). I was speaking to a few clients recently, many versed in Greek political and economic history better than myself, and we reminded ourselves of the 'Greek Colonel' scenario that might be unfolding shortly. Some military intervention with the purported backing of the people both in Greece and even Spain is not completely out of the question.
What is required though is a rapid and convincing case for complete and utter default along the lines of 'no negotiation for creditors', ' an instant exit from EuroZone, the Euro and the euroland fantasy', a promise from Greece to instate a credible tax universe attracting outside investors and the repatriation of Greek assets. It's likely that even then Greece would have riots, social unrest, a divided political system and in this contect it is imperative that some sort of social aid program should be proffered by IMF & "G10". Of course so long as we're all fixated on "too big to fail" and possible "contagion" doctrine nothing positive will ever happen. Politicians and regulators (basically they're the new Gestapo for the sake of anything positive to say about regulation) need to wake up and smell the coffee here asap. A quick glance at Wikipedia under 'sovereign default' should remind everyone that there have been some considerable NOT 'too big to fail' sovereign defaults combined with debt restructuring already in history; here are just some of them---Spain 1557-1596 (four times), Bourbon France after the French Revolution, Denmark 1850, Russia 1917, Confederate States after the American Civil War and more recently Argentina 1982 & 1989 and Russia 1991 & 1998. Incredibly the global tally is Africa c.39; Americas c. 150 (unbelievable statistic); Asia c.26 and Europe c. 91. In fact Greece had problems in 1826, 1843, 1860, 1893 and 1932. It's certainly worth contemplating these extraordinary statistics before anyone thinks that Greece is going to bring down capital markets, world economies and free capitalism.
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