Greek Option: NOT Growth vs Austerity

Who would not choose to increase economic growth as the path to future economic prosperity.

The election results in France and Greece over the weekend were a clear repudiation of the austerity packages negotiated earlier this year as the precursor for further German support and the European Central Bank's LTRO (long term repo operation). That financing directed at European banks was little more than another version of the shell game that has been orchestrated by Bernanke and Geithner on this side of the pond. 

With the election results over the weekend and the social pressures sent along with them, the stakes are raised and the day of reckoning for the EU and the euro would seem to have been moved up. German Prime Minister Angela Merkel has been swift in stating that the austerity packages as negotiated must be upheld. Clearly the electorates in Greece and France and soon elsewhere as well have little appetite for those austerity measures. The pressure increases. The question begs, “who will pick up the EU's enormous bill”?

To think that growth is easily accomplished is naive. Let's not forget that the ratings agencies will be compelled to downgrade the sovereign credit rating of certain of these countries if they think they can increase deficit spending. Not that interest rates in the weaker EU nations are not already high but further downgrades would only push them higher. Higher rates do not exactly do a lot for those hoping for growth. The simple fact is, without the assistance of the European Central Bank and accompanying swap lines from the Federal Reserve, these countries would be capital starved as it is.

Will France, Greece, and other nations within the EU throw in the towel and look to nationalize some of their banking institutions and default on their bank debts in the process? No doubt the electorates in these nations look at that option as appealing. Screw the bondholders and their crony capitalist partners who plundered the nations finances over the last few decades. Seems all so easy, right? The waves from that tsunami would roll across derivatives markets and swamp many banking institutions around the globe. As such, central bankers are under enormous pressure to keep the zombie banks alive – - – at least in form and function.

What is behind door number 3 for certain nations, especially Greece?

Leave the euro and devalue a newly launched currency. Will it happen? What are the ramifications? Citigroup projects the chances of Greece taking this path at 75% within the next 18 months.

The stakes are raised. The standoff continues. The pressure within the EU cauldron is rising ever higher. At some point that pressure will boil over. Where and how it spills out will have enormous implications within the EU and the global economic landscape. However you slice it, though, economic uncertainty does little for economic growth in the EU and the world.

Bloomberg provides further insights on the chances and implications of a Greek exit from the euro in this 3-minute clip.

Those within central banks have been playing the “kick the can, we will pay you later” charade for the last 4 years. Well, “later” in Greece is now right around the corner.

Navigate accordingly.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.