Greece To Germany: “It’s Not EU, It’s Me”

This article was originally published on on February 11th at 10:00am EDT

“The only things worth worrying about are the things nobody is worrying about.”
– Unknown

A good deal of ink has been spilled in the last two weeks concerning the potential exit of Greece from the eurozone and the train wreck that is bound to ensue shortly thereafter. Is it a big deal? Yes. Are all the possible outcomes being considered? I don’t know.

The biggest fear I keep hearing about is that Greece will voluntarily leave the euro and somehow, perhaps within days, the region’s other struggling nations — Italy, Portugal, and Spain, for instance –will be squeezing through the door after it. It’s this secondary fear that doesn’t make much sense to me.

First of all, if Greece exits the eurozone and it’s a disaster, why would anybody else want to jump off the same cliff? And if Greece exits the eurozone and it’s not a disaster, then what have we been worrying about?

It seems to me there are only two realistic, possible outcomes as it pertains to Greece, neither of which is disastrous.

1. Greece exits the EU and the transition is a disaster. (Possible, but unlikely)

First of all, we need to define what it would mean for this situation to be “a disaster.” This seems to be the most commonly held belief about what’s around the corner. My opinion is that a Greek exit could well be a disaster, but just for Greece. The only other parties that would be negatively impacted are holders of Greek bonds. These are mainly hedge funds, other EU members, and the ECB itself. Of the three impacted parties, at this point I think it’s only the hedge funds who still think they own something of value.

What could happen:

  • The euro strengthens immediately, resulting in a swift but limited selloff for both eurozone equities and bonds;
  • Greece issues its own currency (again), which immediately struggles to find a relative value against the euro (and other currencies), though it is almost certainly lower than the Greeks anticipate;
  • As a result of Greece’s weak new currency, its energy costs are insanely high (remember that oil and gas are priced in U.S. dollars). The Greek economy struggles to find its footing and potentially enters a recession or depression;*
  • The prospect for other struggling eurozone nations (Italy, Spain, Portugal) to consider exiting is immediately taken off the table as they watch the goings on in Greece;
  • Other markets around the world are already priced for Greece being worthless. It is actually possible there would be close to zero contagion. Not to be disrespectful, but there are other places one can buy olives.

2. Greece stays in the eurozone (Most likely)

There is so much incentive for all members of the EU (including Greece) for Greece to remain part of the eurozone that both sides are likely to make some concessions in order for a longer-term deal to be made. We are already hearing whispers, not about the forgiveness, but the extension, of payback terms on emergency loans made to Greece by the ECB.

While this would confirm continued austerity in Greece — to which the Syriza party has been violently opposed, at least in its campaigning — it would reduce the short-term impact of the said austerity, providing some relief to Greek companies and consumers.

The EU’s inclusion of Greece benefits its strongest member, Germany, more than the Germans will publicly admit. Because of economic weakness in several of its member states, the value of the euro has plunged in relative terms over the past year. The euro having weakened against the currencies of its trading partners has proven an accelerant for Germany’s manufacturing- and export-based economy. More than half of Germany’s GDP comes from its exports, and the German unemployment rate, at 4.9%, is lower than that of the United States.

It’s impossible to quantify to what extent, but there is no disputing that a stronger currency would hurt Germany, and maybe quickly. In many ways, Germany owes its current position of strength to Greece (and the other EU member nations that have weighed down the euro).

Greece doesn’t really want out of the EU, they just don’t want to pay back their debts. The new administration isn’t claiming the loans were made in bad faith. They aren’t claiming the terms were unfair. They aren’t even claiming they can’t pay them back. They are giving the rest of the eurozone the “it’s not you, it’s me” routine — I just don’t think it’s going to work.

Sometimes the things we spend so much time worrying about end up not being as big as we think. A lot of times, they don’t even happen. Am I worried about Greece exiting the eurozone? No. And neither is the market.

It’s the things nobody is worrying about that worry me most…

* By some metrics, Greece is already in a depression—their unemployment rate, at 25%, is higher than U.S. unemployment rate at any point during the Great Depression of the 1930s.

Adam B. Scott
Argyle Capital Partners, LLC
10100 Santa Monica Blvd, #300
Los Angeles, CA 90067
(310) 772-2201 – Main

Adam Scott’s profile on RealMoney can be found here.

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