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Wednesday, June 15, 2011

Grecian Formula: Part 2 Do you like your lamb lean or leaner?

June 15, 2011. I’m watching the strikes and protests in Greece and the prospective rejection of austerity measures. The Greeks are upset because of draconian restrictions on their spending to balance their budget. Greek bonds are now rated junk (the lowest rating of any country, even lower than Pakistan and Ecuador), and French and Portuguese banks are under review for having Greek debt.

Looks to me like the Greeks are in between the proverbial rock and a hard place:

• They can accept the austerity measures, tighten the belt and pay more taxes and retire later. The Germans will bear the brunt of the bail-out costs, but the Euro zone will hold through the crisis, which will probably be repeated (replace the word ‘Greece’ with ‘Portugal’ for example).

• They can reject the measures and get kicked out of the EU, and then default on their debt. This would probably really hurt the Euro, and clearly the Greeks would then have a whole new set of concerns, like a worthless currency and the inability to raise money. The holders of Greek debt would get stiffed, and their ratings would suffer.

I always wonder what would have happened had the U.S. remained 50 separate sovereign states and then tried to get together to form a common currency. Things would probably be OK while the economy was good, but I could picture states like Minnesota, Alaska or North Dakota getting aggravated at Louisiana when a hurricane hit, or if California ran up its debt too high. Families are tough enough to run, especially extended families, like the EU.

Overall, this crisis will come to a head, because it has to (the debt is coming due). The Greeks will suffer, or…the Greeks will suffer. And maybe a lesson might be learned about spending beyond your means: Hello? Washington?

Pass the grape leaves…

Leon