Greece – How Large a Problem is 2%?

Posted On 02 Jul 2015
By :
Tag:

Three quotes stood out for me this week. I will give you two now and the last at the end of this piece.

  • Merkel: Greece no longer poses a threat to Europe’s future.
  • Obama: Doesn’t see risk of a major shock to the system.

Both are wrong and here is why.

The first reason there is this relaxed view towards Greece is because it is small. Greece only represents 2% of total European GDP.

The second is a little more sinister. The politicians do not want to admit that they cannot find a political solution for such a small problem. This begs the question; what happens when they are faced with a bigger problem which may be the direct consequence of this supposedly small problem?

The main aim of the EU political class is to portray an image of strength, an image of togetherness and an image of prosperity. They cannot be seen to be weak and allowing Greece to leave the EU creates a feeling of weakness. Once one country leaves others may follow. The seed will have been sown and the path once trodden.

This is dangerous as others much larger than Greece may wish to try that path. Remember The UK holds its own referendum in 2017. A Greece exit may embolden the undecided.

Imagine this happening when times are supposedly good. Interest rates are rock bottom, economies are supposedly on the mend and inflationary seeds are beginning to bud.

Now imagine the seeds of discontent in full bloom when interest rates rise which they surely will.

This is contagion, a miserable scenario for the Europhile technocrat.

So that is the political problem mixed in with a bit of interest rates. Now mix interest rates with capital flows and see what happens.

Global capital flows are dangerous. Huge capital flows are hugely dangerous. This is because capital flows down the path of least resistance. The least resisting path has been those economies that can borrow cheaply and can pay back. Southern European nations fit the bill perfectly and Greece as we know is a Southern European nation.

The reason for this is that lenders of capital regard all nations within the Eurozone equally after all they share the same currency and interest rate. They share the ECB. This ‘togetherness’ gave the lenders the necessary feel-good factor to lend. After all the ECB would look after the lender.

Greece wanted to borrow and so the lenders obliged until they decided that they did not want to borrow anymore.

So what happens next? Capital inflows turn into capital outflows. To stop the outflow the borrower has to entice the lender to stay or come back. He does that by paying more interest. Interest rates rise and the ECB’s credibility is questioned as it was not able/willing to look after one of its members.

Magnify this capital flow issue beyond the shores of Euroland and we see huge debt funded by huge capital flows. Imagine worried lenders becoming ever more reticent about lending. The more reticent they become the higher interest rates have to rise to entice them.

Therefore a Greek NO vote this weekend has both political contagion issues as well as capital flow contagion issues.

At the top of this piece I wrote that three quotes got my attention this week. This is the third and whilst it is from someone you most probably have never heard of it is the best. It comes from Latvia’s outgoing President Andris Berzins:

“This Greek debt is so big that everyone understands that it won’t be repaid. Loans to Greece have just bought time so that those in power don’t have to take decisions. This is like a game: who can hold out longer by not showing that this money has been lost? This burden has become bigger and there obviously is no possibility to repay.”

The argument that Greece only represents 2% of total European GDP and therefore insignificant is wrong.

Remember that your bathplug may only be 2% of the whole bath but we know what happens when you pull that plug.


DISCLAIMER: The information contained in this publication is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Users acknowledge and agree to the fact that, by its very nature, any investment in CFDs and similar and assimilated products is characterized by a certain degree of uncertainty and that, consequently, any investment of this nature involves risks for which the user is solely responsible and liable.

Any recommendation, opinion or advice contained in such material reflects the views of TFF, and TFF expressly disclaims any responsibility for any decisions or for the suitability of any security or transaction based on it. Specifically, any decisions you may make to buy, sell or hold a security based on such research will be entirely your own and not in any way deemed to be endorsed or influenced by or attributed to TFF.

Past performance should not be seen as an indication of future performance. Market and exchange rate movements may cause the value of your investment to rise or fall and an investor may not get back the amount invested.

Investors considering opening a self-trading account or investing in the TFF Capital Pool, should limit their exposure to maximum 10% of their investment capital.Eligibility for participation in the capital pool is subject to final determination and acceptance by TFF.

Investments are not obligations of, deposits in, insured or guaranteed by TFF.

About the Author
TFF aims to provide our customers with the best skills and knowledge to achieve their personal financial goals and level the playing field. The senior officials and staff of the TFF Team have more than 80 years experience in financial product trading, sales and fund management. For more information on TFF CLICK HERE.

Related Posts

Leave a Reply

*