Date: July 8, 2015

Rip Off the Band-Aid Greece

As the early tally in Greece showed overwhelming support for the NO camp, meaning they wanted to reject more austerity, markets around the globe braced for another round of strong selling. As usual, the pundits got it wrong. Almost every single interview I watched or read had the vote almost a dead heat. “Famed” investor Wilbur Ross laid a huge egg in not only predicting a YES vote, but also positioning his portfolios for it and then trying to rationalize that the overwhelming rejection of more austerity wasn’t as it seemed because “only” 60% of the country voted! The U.S. hasn’t seen 60% of eligible voters turn out for a presidential election since 1968!

Put yourself in the Greeks’ situation. Each and every bailout has come with more severe measures. Their economy continues to spiral in modern day depression. $266 billion in bailouts since 2010. Their debt/GDP ratio has climbed from 150% to 175%. Unemployment has soared to 26% overall and more than 50% in the under 30 market. Greek banks are essentially insolvent and almost out of cash. They have been closed for more than a week with no sign of reopening anytime soon.

Who would really vote for more of the same, but worse?

This process of kicking the can isn’t working and won’t work in the future. If the Troika (ECB, IMF, EC) really wants to bailout Greece or help them, there’s only one solution. Debt relief. Greece wasn’t able to pay its bill when this whole mess started and those bills continue to increase. At the same time, as the economy shrinks month after month, tax revenue declines which make the Greeks even more unable to pay their bills. Debt relief is the only solution if the Troika wants to keep Greece in the Euro.

However, with outright debt relief comes moral hazard. What would the Troika do with Italy, Portugal, Spain and France if and when they fall on harder times? Won’t they want the same treatment? And we all know how the northern countries including Germany, Austria, Belgium and Finland feel about living fiscally responsibly while the others do not.

I will repeat what I have written many times before. Greece should rip off the Band-Aid and leave the Euro. Circulate those drachmas sitting in the vault. Devalue the currency. Recapitalize the banks. Reflate. While the economy would likely plunge deeper into recession in the short-term with imports next to impossible, it should also begin a strong recovery sooner without the insurmountable debt anchor. Just look at Iceland. Less than five years removed from default, the world started loaning them money again.

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Paul Schatz, President, Heritage Capital