David Kotok Discusses Greek Bailout

Benzinga caught up with David Kotok, chairman and chief investment officer at Cumberland Advisors, to discuss the latest in the Greek bailout saga. In Athens, tens of thousands of Greeks are taking to the streets in order to voice their displeasure over the austerity measures put in place by the government in an attempt to rein in soaring bond yields and stave off a crisis that would end in sovereign default. Negotiations were underway Tuesday between a "troika" comprised of the International Monetary Fund, the European Central Bank, and the European Commission, and the Greek government in order to come to terms on a second bailout package. "This is a really tense moment, and it may turn out that they will fund a certain amount in order to buy more time and hope to find resolution with the Greek parliament," Mr. Kotok said. "I'm not so sure that works. The polls are showing 80 percent of the Greek population does not want any more austerity, and so we may face a parliamentary issue and a government change."

The aim of a second bailout is to prevent the need for any sort of restructuring of Greek debt, resulting in bondholders being forced to take a haircut on their holdings. These bondholders are the European banking system, which along with the European Central Bank holds the vast majority of Greek sovereign debt, and are what Mr. Kotok refers to as "the big thing that lurks in the background." Of a default, he said, "The banks in Greece will have their capital nearly wiped out if the Greek debt defaults, and other banks in France, Germany, and other places in Europe would suffer because they are not reserved for any default or write-down of Greek sovereign debt, and they hold some."

Greece floated the idea over the weekend of attempting to close their fiscal deficit through privatization of government assets. This plan has been met with a fair deal of skepticism, as critics wonder whether this is really a viable solution for raising cash. Mr. Kotok pointed out that this plan does nothing to address the solvency issues that Greece currently faces. "What are they going to do, sell the Parthenon? It just doesn't work," he said. "Could they raise 25 billion euros? Maybe. They owe 330 billion euros and the amount is rising. The deficit currently is in double digits. Real estate values in the country are falling. The unemployment rate is 15% and rising, and the GDP is about 230 billion euro and shrinking. That is a recipe that cannot be resolved by a short term infusion of a few billion euro."

Mr. Kotok pointed to an alarming trend in the banking systems of heavily indebted eurozone countries such as Greece and Ireland as consumers rush to pull their savings from problem banks and place them in safer institutions. While this has been taking place in Greece for months, Ireland's banking system is quickly getting familiar with the troubles of deposit withdrawals as well. Mr. Kotok said, "As soon as you have this notion of 'I do not trust my bank,' you have the recipe for a spiral. We are seeing it in Greece and in Ireland rising now to double digit rates of withdrawal of deposits. It's the banking system that's at risk here and that's what has them scared."

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