A DIFFERNCE OF OPINION

We think it's healthy to often take the other side of certain trades and discussions, not so much to be cantankerous or adversarial but rather to stimulate critical thought and open up different points of view.

Here is an article from marctomarket.com about the Greece fiasco that we take issue with on numerous points. It's more of a compliment than a criticism, however, simply because we take the time to read and have respect for the writer's opinion. We simply disagree.

Greece needs about 10 bln euros by the end of the month.  The negotiations are fierce.  Although the ECB and Germany are clashed over the conduct of monetary policy, they seem to be in agreement, not to concede to Greek requests for debt forgiveness or a debt swap.  At least until the end of the month, German media is unlikely to repeat the slur, referring to the ECB as the Banca d'Italia's Frankfurt branch. 

In his critique of the Versailles Treaty that ended WWI, Keynes cautioned that the bleeding of Germany can only lead to ruin.  He urged the creditors of the day, not to be shackled by paper--contracts.  The current generation of European creditors appear so antithetical to what has become Keynesian economics that they are willing to ignore the important insight that there is a limit to people's willingness to turn their output to service foreign debt. 

Ironically, it appears that others have understood Keynes' insight.  Egypt has roughly the same rating as Greece.  Fitch and Moody's rate them identical (B and Caa1 respectively).  S&P rates Egypt B- and Greece B.  Saudi Arabia, Kuwait, and UAE have given Egypt more than $12 bln in aid, deposits for the central bank and petrol since 2013. News reports indicate that they will deposit another $10 bln in Egypt ahead of the large investment conference next month. 

Egypt, like Greece, is trying to repair its economy with structural reforms, and appealing to foreign investors.  It faces domestic strife between President Abdel-Fattah al-Sisi and former Islamist President Mursi and the outlawed Muslim Brotherhood.  The new government in Greece faces powerful resistance by its official creditors and the domestic oligarchs and chronic tax evasion. 

Saudi Arabia, Kuwait and UAE see a slippery slope.  The current Egyptian government is an important bulwark against a threat that could jeopardize the political stability of their regimes. As ironic as it may seem, Greece's official creditors are less enlightened.  Even at this late date, they pretend that Greece has to decide whether it wants to remain in the monetary union or not.    To remain in the money union, they insist Greece needs to respect current agreements, even though they have clearly failed.  

The IMF itself has admitted it under-estimated the fiscal multiplier and over-estimated Greek growth.  It resists a mid-course correction.  The ECB and Germany seem particular sensitive to its slippery slope: whatever concessions are made to Greece will likely be demand by others.  Both Portugal and Spain hold elections later this year.   Spain's Podemos is polling strongly and share Syriza's predilections, even though Spain is among the fastest growing in the euro area. 

Below the surface, there is a sense in official circles that Greece can leave and not pose systemic risk to EMU.  This a grave risk.  Officials have repeatedly been surprised by the market's reaction.  Remember Lehman?  The Swiss abandonment of its franc cap? 

A Greek exit would demonstrate once and for all that EMU is reversible.  If Greece leaves and has a deep recession, high inflation and an intense banking crisis, as would be expected, it would be a severe cost to its creditors.  If it finds that its only friends are adversaries of Europe, like Russia, which has already offered assistance, would EMU members really be better off?  Negotiating with Greece, devising a new and sustainable course will

Let's take the Keynes point first that  creditors "should not become shackled by paper--contracts." 

Contracts are far as we understand them have something called consideration. They also usually have covenants, stipulations both sides agree to when signing.

Leave out the concept of duress for a second, which incidentally usually increases because of the wretched financial state the prospective borrower has allowed himself to get into.

The current generation of European creditors appear so antithetical to what has become Keynesian economics that they are willing to ignore the important insight that there is a limit to people's willingness to turn their output to service foreign debt.  

Greece is a notorious debtor with a fiscal responsibility record you won't find in Webster's anytime soon under exemplary. Any opposition to Keynesian style economics is good not bad opposition. Where is the responsibility on a nation to run it's affairs so it won't have to be frequently asking for handouts?

If there is a "limit to people's willingness to turn their output to service foreign debt," there should also be a limit to how many times a country can water up that the handout trough. And that's what this really is,another handout.

Moreover, comparing Greece's current situation to post-WWII Germany is about as disingenuous as disingenuous gets. The two are hardly analogous.

The next point that the economic globe will somehow burst open and disintegrate if Greece goes off the euro or in fact exits the EU is more negative clap trap to kick the can of economic reckoning farther down the road.

Concerns about fallout if Greece gets its hat are over-rated. Nobody knows for sure what for sure will happen. Uncertainty is as much a part of lending as it is of life. 

A creditor who doesn't expectt to be repaid is a sick creditor. A borrower that knows it can't or has no intention of repaying its loan is a crook.

Implying that the market's reaction to a Greek exit from the EU will surprise to the negative like those with the Lehman and recent Swiss franc sideshows is also questionable.

The real market surprise might be three or four sustained global Halleluiahs!

Then there is the argument the writer makes about reversibility. 
A Greek exit would demonstrate once and for all that EMU is reversible.

It's a bit ironic that the author doesn't view violating the covenants of the borrowing as having the same moral hazard. We can borrow and mismanage all we want because in the end they'll cut us some slack. It appears that the definition of precedent is much like beauty.


Then there's the slippery attempt to slide one by based on the various rating agencies' debt ratings comparing Greece and Egypt. 
The suggestion here is that these rating agencies are infallible which we all know by experience, to use a kind term, is stretching things a bit. 

Lastly, the so-called German media slur "referring to the ECB as the Banca d'Italia's Frankfurt branch," reminds one of a salient, never-changing point: Truth always comes with a bite.