Assuming that the $146 billion bailout of Greece goes ahead as planned, investors can forget about a Greek crisis for about three years.
And start to focus on Spain. The debt problem there looks like it’s developing along exactly the same path as the Greek debt crisis. I’d call the current stage denial of the size of the problem: On Friday Spanish finance minister Elena Salgado announced a new austerity plan that would save $21 million a year by cutting 32 senior jobs in government and eliminating 29 public agencies. Not exactly impressive for a government facing a $140 billion annual deficit. (Spain’s economy is about one-tenth the size of the U.S. economy so that deficit is equal to about $1 trillion in U.S. terms.)
It’s by no means certain that the bailout plan agreed to by European Union leaders over the weekend will go through. The biggest source of uncertainty, as it has been through the crisis, is Germany. It looks like Angela Merkel’s government has the votes to get the plan through the German parliament but the measure faces a constitutional challenge in the country’s supreme court, and there is a possibility, albeit small, that the court could stay Germany’s contribution to the bailout, until it rules on the issue. It’s doubtful that the court would decide to throw the European Union into crisis—the Supreme Court follows the election results, as Finley Peter Dunne’s Mr. Dooley commented about the U.S. court more than a century ago, so let’s assume the deal goes through.
Then what?
The bailout package from the IMF (International Monetary Fund) and the European Union would essentially remove Greece from the public financial markets for three years. With the Greek government able to borrow from the bailout fund at 5% interest—not exactly a bargain—Greece doesn’t have to worry about refinancing its debt—including the first installment on May 19—this year or next and probably not until 2012 or 2013. By that time, or before I’m sure the leaders of the European Union hope, the Greek government will have demonstrated its fiscal discipline and be ready to return to the public financial markets.
I doubt that the future will unfold quite so neatly. To meet the targets under the budget plan drawn up by the Greek government, the IMF, and the European Union, Greece is going to have to live with a sinking economy and falling standards of living for a long, long time. Standard & Poor’s calculates that the Greek economy won’t recover to its 2009 level of GDP until 2017.
I don’t see any Greek government surviving that long a period of pain. And with the budget plan set to send Greece into an even deeper recession than it is in currently, I just don’t see how Greece can escape its current debt load without an eventual default.
The $146 billion bailout just pushes off the deadline for that default.
But that leaves the world’s investors free to move on to the Spanish crisis.
The annual deficit is bigger. The country’s dependence on external financing much, much larger. Its politics more intractable with the national government facing 20% unemployment and thinly veiled hostility from some of the more important regional governments. And its politicians even more feckless. Prime Minister Jose Luis Zapatero continues to insist that the worst of the crisis is over even as the crisis gets worse.
And, of course, there’s the little problem of the Greek precedent. Having bailed out Greece, can the European Union not bailout Spain? The argument has been that Greece couldn’t be allowed to default because it would endanger, if not destroy, the euro. It’s not clear to me that this argument was actually true in the case of Greece, but it almost certainly is in the case of Spain. The Spanish economy is some four times larger than the Greek economy and big Spanish banks, unlike the biggest Greek banks, are deeply embedded in European financial markets.
However, if a $146 billion bailout for Greece was big enough to create serious political problems in Germany and France, then a Spanish bailout estimated at $500 to $600 billion is big enough to be politically suicidal for any sitting government in those countries.
In the Greek crisis, European Union leaders dithered so long before coming up with their plan that they made the crisis worse. I expect the same in the Spanish crisis.
bluevette,
I personally own GLD, and prefer it over gold miners. GLD tends to track the price of gold better than mining stocks do. There are many factors which affect gold mining which don’t apply to the commodity they produce, such as poor management decisions.
One of the major problems I have with most mining companies is their awful financial management. Their financial statements frequently look like train wrecks waiting to happen. Yet, investors continue to buy the stocks of these companies to gain “exposure” to their commodity, when they could just as easily get the true exposure via an ETF. Why buy something that will “act” like gold, when you can buy…gold? A physical ETF can get you that. There are several out there, including GLD, IAU, and SGOL.
That’s my two cents. I know Jim, as well as my father, prefers the mining stocks. I won’t say “I’m right and they’re wrong” because I have too much respect for both of them, but I just can’t bring myself to buy a significant holding in a company whose financials are too ugly to me.
Thanks for your answer EdMcGon… I have invested in those and they have started to move… Someone mentioned GLD. Would that also be a safe place too?
Mr. Dooley’s wisdom fit the end of the 19th century,another age of rampant financial speculation when fortunes were make by bilking investors. I like Dunne’s writing now as a reminder that there’s not a whole lot new in this crisis. Or in human nature.
Competely off topic: Until this post, I had never heard of F.P. Dunne or his character, Mr. Dooley. But I like one of his quotes…it seems to go with the times, “High finance isn’t burglary or obtaining money by false pretenses, but rather a judicious selection from the best features of those fine arts.”
Thanks, Jim.
In a nutshell Greece scared us. We now know, however, who really rules in EU: Germany. Germany and France planned the Euro; Germany, in order to build an alternative capital financial market, maybe to facilitate an European expansion Eastward and France maybe scared of the future political implications of the reunification of Germany. Well now it looks like it is time for them (if there are room for something to agree on anymore) to build EU for real. IMHO, without a real politic structure EU will hardly survive another big crisis. This, maybe, will be the time when EU will concede local national fiscal power to European fiscal power and discipline. If not, it is hard to forecast the future of EU. Let’s not forget that the Greek crisis is not ONLY a Greek crisis. It exposes the original sin of EU. Now, everyone need to ask himself whether is EU more important for Germany or the New World (i.e. Russia and China).
All this take me to wonder, and actually, research the Macro Trade Regions for insights. (EU, NAFTA, Mercosur, Asean, Aeie, Caricom. Can, Mcca, Acp and Apec).
IMPUY is a platinum play jim recommended also.
bluevette,
I can answer that for you. Jim has already recommended GDX and GG.
robert,
It means the government bonds they’ve issued, they won’t be able to pay back. When a government takes out bonds, it means an investor basically gives the government a loan which the government promises to pay back with interest after some period of time. In this situation, investors are worried Greece won’t be able to pay them back, thus a default.
haha! and good find: Its = possessive. It’s = contraction for it is. i do the same thing, poetic license for typing fast.
Greek default.. ? What does that mean ? Their money is the EURO, what are they going to do,, default on the EURO ? To my mind, they have two ways out, …..pay it, or ……pay it.
They can’t inflate their way out, it’s the EURO.
They cant get out of EU. They are part of EU, they enlisted.
The greeks are stuck.
Jim,
Let’s say EdMcGon is right on this… Which in the past he has made just about the same sense as you…… How would you play the Precious metals/Commodities to make money here (and protect your money in the long run)
Look at NBGPRA as a safe way to play NBG. I am also adding to my GLD.
flgator,
I’d cash in, but then I wouldn’t have bought it last week anyway. I’ll give you credit for cajones with that buy. Gutsy.
bsdgv,
It’s a living…
What do you guys think of NBG (National Bank of Greece) at this point with the bailout news? I bought last week and am up 24%. Should I hold on for more or cash-in my gains?
> It’s politics more intractable with the national government facing 20% unemployment and thinly veiled hostility from some of the more important regional governments. And it’s politicians even more feckless.
What’s going on? Jim’s contracted it’s-itis from EdMcGon!… 🙂
The eventual end result will be a lower standard of living for all in the Euro zone. Can Germany and France accept that? Can a leopard change its spots? Take notice America, we are headed down the same path. Will the rich and powerful give up some of theirs so the down and out can survive? That struggle is going on now.
I have a friend in Spain who refers to Zapatero as “Mr. Bean” (pull up his picture on the internet and you’ll see why). But my friend doesn’t call Zapatero that with any affection.
Just wait until July when Spain refinances their debt, and I’ll be handing out the “I told you so’s” by the bushel. This is going to get mighty ugly folks. Buy gold and other precious metals.
Jim, I feel exactly the way you do. And still, all over the French media and the internet blogs, they advertise that the crisis is over, stocks regain ground. I think I am going to get rid of my financial stocks.
“On Friday Spanish finance minister Elena Salgado announced a new austerity plan that would save $21 million a year by cutting 32 senior jobs in government and eliminating 29 public agencies. ”
That’s awesome…she clearly went to the Obama school of cutting gov’t spending.