Monday, August 3, 2015


Greece.  Other than playing the heavy in this ongoing surreal drama, it appears that the rest of Europe receives no attention.  By the by, the Athens Bourse opened again today and crashed as expected, down 16% at the close.  Greek GDP has collapsed as has the manufacturing sector and the as a result of the other..or vice-a-versa.  Whatever.  Back to Euroland.

It may be hard to imagine at this point in time, but the Greek crisis may have more of a material, long-lasting effect on Europe than on Greece.  That may not be a bad thing.  We should remember that the European Union was really an exercise in politics than a political or financial union.  If one is to be honest about it, it was really conceived as a way to keep Germany from roaming about outside of its fences as had been the case for the previous 100 or so years with all the unpleasant results that accrued.  Would Germany emerge as a premius inter parus in this scheme?  Probably was the thought but it avoided the alternative which after two wars was firmly implanted in the European mind.  It really wasn't a bad idea but with the political scheme exhaustively thought out, not enough thought was given to the fiscal foundation and although warning bells were sounded literally around the world, there came the birth of the Euro, a screaming, howling child with no mother, no father and hence, no discipline.  Some cleverly stayed out of the nursery like the Brits and have lived to rejoice although from time to time they have tried as hard as they might on their own to cock things up to a fare-thee-well.  The common currency has caused all sorts of mischief.

Unfortunately, whilst taking this bold step, Europe remained firmly rooted in things past which has caused as much difficulty as the currency.  In a world of rapid innovation and greater decentralization, Europe became more central in it's governance and more resistant to innovative change in many areas.  The European Commission and Legislature took on the greatest role in rule-making to the smallest level in local economies.  With that came the expected inefficiencies which seem to always connected to governmental bureaucracies.  At the same time, which creating a common market larger than that of the United States, the inability to modernize probably the most important sector to a continent recovering from unbelievable destruction, the financial sector, has cost Europe dearly.  The difference between the Europe of the start of the 21st Century and the Europe of the 20th Century was, in this critical area, very small, indeed.  Europe's present and its future revolved around its financial sector and the financial sector was its banks.  And the banks never changed.  Oh, they created different products to be sure and operated in different sectors, but the one thing that never changed, for the entire history of Europe from the end of WW II, be it in periods of nationalizations or until today, was the connection of national governments to the financial system and the special relationships fostered therein.  I think it is accurate to state that the condition that Greece finds itself in today is a result of that relationship.

Greece, to be sure, has been an exercise in governmental malfeasance but one made possible through the insanity of sovereign risk lending conducted as if there was not risk, encouraged by national and Euro-wide governments and regulatory bodies that supported that belief.  And it was just not Greece. All of Europe and all of the European institutions and corporate entities were financed by banking sectors that were inextricably intertwined with the political forces at large, irrespective of party affiliation of philosophy.  If there was to be a Greece, or an Ireland or a Portugal or a Spain it would not simply be a governmental/political crisis simply solved in a political manner by voting the rascals out, it would always be a banking crisis and solving that is no easy task.

As we have said over and over, the difference between Greece and Mexico in 1982 wasn't that great.  First, you save the banks and once you do that, you figure out where to go from there.  But, there are ways to do that that can create far greater problems in the future if you do it wrong and because of the relationship between European financial institution and their governments, the Euros got it wrong; they just didn't save the banks, they bailed them out substituting the European taxpayer for the bag holders in this tragedy.

I will not pretend that in the early days of the Latin Crisis that all involved knew where it was heading but I can say with perfect certainty that within a few years the unsustainability of the debt burden for most of the countries involved was readily apparent to most and the solution, though not a happy one was clear.  the only question remaining was when and how much and how best to prepare one's self for the inevitable.  Most of us did a pretty good job and one thing to keep in mind as well is that we learned from it.  There have been sovereign risk disasters since that time but there has been very, very little cross border sovereign risk on the books of American banks.  Very little.  Not so in Europe and in addition, the appetite for sovereign risk in this country has been satisfied by mutual funds and hedge funds who invest their own money (well, capital levered up to the gills but that is another story).  The growth of the capital markets in the United States, unmatched anywhere else in the world has made this amelioration of risk possible.  This has not been the case in Europe.

What Europe now faces is the same situation we faced in the eighties except taking the place of shareholders there are voters and that is a game changer; an immediate one and one with far reaching ramifications.  I hope to follow up on those thoughts as the week progresses.  Hope you stick with me and offer thoughts of your own.

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