Why Greece Matters - To Everyone
The debate, long overdue, is now on - does Greece matter? Bulls say no - little country, size of Alabama, the bigger eurozone nations have stepped in to stop the problem. Bears say yes, Greece is the tip of the iceberg, first of the dominoes, plus some other clichés, next come Portugal, Spain and Ireland.
All of this is true and somewhat irrelevant. Greece matters - greatly - for, like a headlamp finally cutting through the fog, the Greek debt crisis is illuminating what lies beyond the current opacity masking realities in the world banking system and in public finance in developed nations. And with the unmasking of these problems - not issues, problems - the first seeds of doubt about the value and worthiness of sovereign debt of all sorts have been planted. World equity and debt markets will sow this harvest in the coming months and years. Even as we eat dinner tonight, there are corporations with a higher credit rating - based on the interest rates they are paying - than the United States government. Not a doomsday scenario - the world will muddle through as always - but a future that will see very sluggish economic growth at best.
Greece has brought to light - and created energy to accelerate - the final stage of delivering, the shrinking of the balance sheets of nations that matter. And as this movement picks up steam, with less speed but similar force to the loss of faith in Bear and Lehman, citizens and investors will see an end to the floods of borrowed money used in the past to goose spending and growth - and secure votes.
Why Greece, why now?
Nations, including the US, have been borrowing too much for too long, as have their citizens, making the underlying facts clear. That countries have borrowed too much and owe too much is a statement of fact, not opinion, if those nations do not want these debts to impinge on future growth. Some are ridiculous - Japan, Italy - some are in decent shape - Germany - some were in manageable shape and crossing their fingers before the financial crisis hit - the UK and US. But the leaders of all nations, led by the UK, US, and Germany, agree the borrowing party is over. Even if they want to borrow more, bond and derivatives markets - made alert by Greece - will make this too costly, financially and politically.
Why now, besides Greek sunlight? Two decades of frivolous borrowing and even more frivolous lending - in the private sector - brought the world financial system within days of a total meltdown and created the Great Recession. Tax revenues fell, spending increased, borrowing increased. So add a Great Recession to Greek sunlight and you have wholly new psychology markets for sovereign debt - markets more than willing to short bonds as much as they are to buy them, markets that set interest rates independent of the wishes of the politicians and the people that voted for them - or against them. People often forget a sovereign debt and a currency are only as valuable as belief in the nation issuing that debt and currency when compared to confidence in other nations selling their debt and issuing their currency. And to restore confidence, fiscal contraction will be necessary. And, not because of Tea Party activists who decry everything, propose no solutions and are nowhere seen ripping up their Social Security checks or Medicare cards, but because of the fears of average, everyday people, especially in the US and the UK, most politicians agree - "no more stimulus," "no more unnecessary borrowing."
What does this mean for markets, stocks, investors?
First, the withdrawal of stimulus in the peripheral countries and eventually larger nations will lead to a renewal of the Great Recession in Europe, including the UK, next year.
Second, the new psychology of the sovereign debt market puts this fiscal contraction in a race against rises in interest rates and currency devaluations. The more fiscal spending contracts, the better the odds that market based interest rates for sovereign debt rise more slowly - and the less need for market based devaluations of currencies, specifically the euro and the pound. (The yen is in a world to itself due to the massive on shore savings in Japan the government is slowly burning through to fund incredible deficits and the yen does not really matter in world currency markets.) Given politics and politicians everywhere, fiscal contraction will lose - it will be slower than the rise in interest rates and the devaluation of the pound and the euro. This devaluation has begun - the euro was north of $1.55 when I was last in Europe, it is now $1.29 and falling; the pound was $2.00 and is now $1.50. Analysts are looking for stability at $1.10 on the euro, $1.25 on the pound. This slide will continue as confidence in the sovereign debt falls.
Third, US companies facing European markets will be hit twice - depressed demand due to this recession and an increasingly unfavorable currency climate. For as the pound and euro fall, up goes the dollar. To quote the a wise man from Brooklyn - actually, everyone form Brooklyn is a wise guy or gal - "it just gotta be."
And that brings the discussion back to the US. Warren Buffet may be crowing about a near shaped recovery, and he is a financial genius, bunt he is also a long term investor who can often be accused of cheerleading - and a man of his stature almost has a moral obligation to cheer the economy on from the front, so this is not criticism. But I would rather stick with my view - a double dip or stagnation in the US beginning in Q3 or Q4 - or go with Jack Welch's, stagnation and maybe a smallish recession with the end of stimulus sometime in early to mid 2011. All of this without consideration of a crisis in Europe, another European recession and a strengthening dollar.
Bottom line: Greek sunlight is shaking up sovereign debt markets and this will have a tremendous ripple effect on fiscal matters, growth, and consumer spending, in turn hitting growth, profits, stocks and markets in the fourth quarter of this year and into 2011. It is hard to see how the current prices of the US equities can be sustained in the face of this economic slowdown combined with the possibility of slightly rising interest rates.