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Greek Endgame Drags On
I started writing this post from the Kuching airport, after a ten day visit to my parent’s house. This visit is vastly different from my last one in March this year when I first discovered the full extent of my parents’ dementia. After the initial shock, all the siblings have put our heads together to work out a sustainable solution to accommodate my parents’ wishes to continue to live at home in Kuching which is my mum’s hometown. There were many heated discussions in the past seven months as each sibling had different views on what is the best solution but when all parties are reasonable and sincerely want to achieve a common goal which in this case is our parents’ happiness in their golden years, a solution can be worked out. Things were humming along nicely in their household when I arrived, with only a few minor hiccups which I was able to sort out quite easily.
Thanks to the internet and broadband, the world has become a lot smaller. Despite being in what felt like a remote corner of the earth, it was quite easy for me to keep in touch with my family and pilot students in Australia through Skype and email. I was also able to keep up with what was going on in the world – from the daily dramas in the European debt crisis to Kim Kardashian’s ill-fated marriage to Kris Humphries. I can see similarities between these two problems. In many ways, the Eurozone is like a bad marriage between spenders (like Greece) and savers (like Germany) who are trying to stay together for the sake of the children (the Euro). Kim has already decided to divorce her husband after 72 days of marriage. Will Greece do the same? George Soros gives the latest Eurozone deal at most three months. I think it is quite clear that a proper default (not the kind where private investors are forced to take a “voluntary” 50% haircut, public investors only take a 21% one, and credit default swap sellers get away scot free as this not considered a credit event) is inevitable. As Barry Ritholtz said “let the normal capitalistic process of failure run its course”. The question is whether Greece will be allowed to do that due to fear of a contagion effect, but in reality contagion has already started.. When private investors saw what happened to private holders of Greek debt, they are naturally fearful of holding other European debt which led to the collapse of foreign investors like US broker MF Global. Although they were not directly affected by the Greek haircut, they became a casualty due to their exposure to debt of other high risk European countries such as Belgium, Italy, Spain, Portugal and Ireland. I cannot remember who said this but one commentator said “the medicine may be more toxic than the problem” as again we see how another quick band aid solution always has unintended consequences.
The real solution for Greece is probably to do what Iceland did which is to hit the reset button so they can start afresh again. After the initial pain experienced by their banks (and their creditors) who made risky bets, Iceland is on the road to recovery, unlike Ireland which is still languishing because they decided to bail out their banks at the taxpayer’s expense. “Iceland did the right thing by making sure its payment systems continued to function while creditors, not the taxpayers, shouldered the losses of banks,” says Nobel laureate Joseph Stiglitz, an economics professor at Columbia University in New York. “Ireland’s done all the wrong things, on the other hand. That’s probably the worst model.” If Greece takes this path, there will be a lot of pain for their creditors which include the banks of other European countries. If the Greek referendum was allowed to proceed, the people would have most likely chosen the Icelandic solution but that has been called off at least for now, it looks like we have to wait for the latest band aid solution to fail. If George Soros is right, it may not even last as long as Kim Kardashian’s marriage. For a real lasting solution to the European debt crisis, there must be a common goal that all parties are prepared to work towards achieving.
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