Greece is front page news again, and there are a lot of inflammatory statements being made about the potential magnitude of the disaster. While times may be tough for the Greeks, and certainly they face tough political decisions – what happens in Greece will not drag down the U.S. or world economies.
Greece has had a long history of spending beyond its means, a bad habit which was indulged by the rest of Europe for too long. That indulgence has worn thin, the Europeans moved to impose some degree of fiscal reality on Greece, and the rest of the world has witnessed a see-saw of agreements, bargains and attempts at reform.
The bottom line is that Greek governments have tried to make aggressively irresponsible spending programs work in their country while trying to also participate in a European Union which didn’t want to pay for such imprudence. Too much money was being spent by a government which didn’t have the money in the first place, and we’re now witnessing the result.
There were some putative attempts at reform, and after several years the Greeks were finally starting to see a glimmer of economic growth. Unfortunately, Greece elected a mismanaged government this last January, and its economic and financial situation has gotten worse ever since.
Instead of trying to boost growth and pay its debts, by trimming government spending and reducing regulation, the government is saying it won’t cut retirement benefits and wants to raise taxes on what little private sector Greece has left.
Since Greece no longer has its own currency, it can’t just devalue its currency to deal with its fiscal problems. Greece ran out of its own money, it ran out of other governments’ money (the European Union’s), and it ran out of private investors’ money. Private investors will no longer buy Greek bonds to finance the country’s fiscal problems, and the EU won’t extend loans unless Greece really fixes those fiscal problems.
The current Greek government decided it would play chicken instead of dealing honestly with its people or its creditors. The government refused to institute the necessary reforms, told its European Union creditors it will hold a July 5th referendum to decide whether to adopt real reforms, and now is urging its citizens to vote against that same referendum.
This was all played out at the very last minute. Greece waited until the last possible moment – this weekend – when talks broke down. Not surprisingly, Greeks want to pull their money out of Greece, so the Greek government has declared a “bank holiday” until July 6, during which depositors can only withdraw 60 euros per day.
Greece is headed for a double-dip Depression. Fortunately, Greece is not Lehman Brothers. The more accurate analogy is Detroit. In size, significance and potential impact, Greece is a kin to Detroit. When Detroit defaulted, the U.S., and even Michigan, survived just fine.
The impact of Detroit’s default was negligible to the economy at large because the default was simply the accounting recognition of the damage that had already been done. The economy and the markets had already recognized Detroit’s insolvency. Likewise, Greek’s insolvency has already been recognized in the markets.
The default will not damage the U.S. or world economies.
The silver lining here is that forcing Greece to shape up or go through a formal default and potential withdrawal from the EU will prevent future, larger problems. If the European Union had blinked and allowed Greece to simply ignore the need to fix their problems, what would have stopped Portugal, Spain or Italy from ignoring their hard choices?
The message being delivered – finally – is that governments have to manage their own fiscal situations, and they don’t have unlimited opportunities to make others pay for their largesse.
The U.S. market is down as we write, but we expect a rational recovery in short order. If for some reason, there is a spasm of irrational fear, it will be a buying opportunity. Stay the course.
