Well, the Greeks voted “No,” yet markets didn’t crash and the world didn’t end. What should we worry about next?
I don’t mean to make light of the situation. But Greece’s vote to reject the bailout terms of the European and International Monetary Union -- and potentially abandon the euro -- is actually a plus for world equity markets.
Here’s why:
Greece should never have been allowed into the eurozone from the start. The nation has a long history of profligate spending, weak tax collection, union dominance, gargantuan budget deficits and serial debt defaults.
Now its neighbors have had about enough.
Richer countries like Germany and the Netherlands are tired of bailing Greece out. The Greeks, in turn, are angry that monetary policy has been outsourced to Frankfurt and that they have had to adopt harsh austerity measures.
In the past, the country’s economic problems would have caused a sharp devaluation of the drachma, boosting Greek exports and the nation’s tourism industry.
But as a member of the eurozone, no currency adjustment was possible.
Part of what has unsettled markets is that no mechanism was ever put in place for weaker countries to leave the currency union. (Blindness to unintended consequences is typical of government engineering.)
In yesterday’s referendum, the Greeks were given two unattractive choices. But they chose the worse one for themselves.
German Chancellor Angela Merkel and French President François Hollande have called for a summit of European leaders tomorrow. But don’t expect a quick result. Caving to Greece’s demands would only encourage other indebted nations in the monetary union to follow a similar course.
But don’t expect things to draw out too long either. Greece is out of money. Bankrupt. Without enough food, medicine, cash or credit, the country is on the verge of a humanitarian crisis.
If Greece ultimately exits the eurozone, it will still be a disaster for its citizens. Debts will have to be redenominated in a new currency, causing interest rates to skyrocket and deficits to worsen. It will be bad news indeed for the long-suffering Greeks.
But the default is not going to have a long-term impact on world financial markets. Fourteen years ago, Argentina - with an economy twice the size of Greece’s - defaulted and world markets barely shrugged.
Yes, Greece owes its creditors $271 billion, but that is only one-third the market cap of Apple (Nasdaq: NASDAQ:AAPL).
Plus, European banks are stronger today. When the problems with Greece became widely apparent during the financial crisis, these banks were loaded with Greek sovereign bonds and already reeling from bad mortgages at home and other toxic debt. Since then, European banks have shored up their capital base and sold off (or written off) a lot of Greek debt. And many new firewalls have been put up. There is little chance of a banking crisis outside Greece.
Also, markets have had plenty of time to adjust. No one is going to be shocked when the “Grexit” becomes a reality. What derails markets is nasty surprises, not long-simmering problems.
I don’t mean to downplay the situation. Greek unemployment is already at Depression levels. The economy is one-quarter smaller than it was before the world financial crisis. And, as I mentioned, a move out of the euro will only send the Greek economy into a deeper hole in the short run.
But the nation’s economy is only the size of South Carolina’s. The effect on global GDP will be indiscernible.
The real threat, of course, is if Greece’s problems eventually spread to Italy, Portugal or Spain. Right now, however, bond markets are telling us that scenario is unlikely.
Moreover, I see some good things coming out of this:
- The euro -- still overvalued -- will eventually fall to parity with the dollar and perhaps trade at a slight discount. That will make European exports and travel cheaper, ultimately boosting those economies
- Citizens from the U.S., France and Japan have grown tired of hearing fiscal conservatives complain about budget deficits. But weak growth and rising debt is a toxic combination. Greece is an acute reminder that actions have consequences.
- It will focus economic policies here and abroad on the most important thing: economic growth.
Why is growth paramount? Because it is the foundation that supports everything societies need. You want more jobs? Growth is the answer. You need additional tax revenue? Growth is the answer. You want a stronger defense, solvent entitlement programs, new infrastructure, a cleaner environment and a balanced budget? Growth is the answer.
Yet Western governments continue to hamper entrepreneurship, business development and investment with confiscatory taxes, anti-growth legislation and thousands of pages of new regulations each year.
More than 2,000 years ago, Athens showed the world that individuals can govern themselves. Today it is demonstrating that self-government also requires fiscal responsibility.
Let’s hope leaders from Washington to Paris to Tokyo are listening.
Good investing,
Editorial Note: These are humbling, even perilous times for Greece. And yet, within the debris of this humiliation are the seeds of extraordinary opportunities.