• Michael Rosen
    • Investment Insights are written by Angeles' CIO Michael Rosen

      Michael has more than 30 years experience as an institutional portfolio manager, investment strategist, trader and academic.


    Published: 07-06-2015

    I’m not sure why the pundits were predicting the Greeks would volunteer to walk meekly to their certain ruin, but the vote yesterday apparently surprised these experts. European equities are down 1 ½%, bonds of Italy, Spain, Portugal are selling off, the euro is a little weaker. Risk off, but the markets are not pricing in any calamity this morning.

    Of course, just because the Greeks voted against certain repression, does not mean they will avoid it. More like choosing the devil they don’t know for the devil they do. Unlike the dramas of their ancestors, there are no gods likely to come to their rescue.

    The next few days and weeks will require some responses from Brussels (and Berlin, where the power resides). Greek banks will run out of cash this week, and the ECB will have to decide whether to extend emergency loans. Their charter prohibits lending to insolvent banks, and Greek banks are clearly insolvent, but Mario Draghi may yet find a way to re-interpret “insolvency” in order to maintain order. If not, the Greek government may start issuing script, a de facto drachma, as internal currency.

    The technical questions of liquidity are part of a larger, and more complex, political drama. The Germans see the Greeks as profligate and unreliable, children who have lived high on German labors, and need to be cut off for their own good. Italy and Spain, struggling debtors who might be sympathetic to leniency for Greece, support a hard line because each government faces elections at the end of this year and are fearful that concessions to Greece will embolden the extremist opposition parties they face. Politically, then, Europe seems to be moving to squeeze Greece out of the eurozone, betting that any fallout can be contained, that the Union will be strengthened without a failed state that they rue having admitted in the first place.

    For Greece, there is no good ending, in or out of the eurozone, all options are painful. The sad fate of the Greeks is sealed, but for Europeans, the stakes are much higher, even existential. A failed state bordering Turkey and close to Russia presents a geopolitical threat every bit as great as Ukraine. Expelling Greece may make sense on one, narrow level, but the ramifications on European security may be far worse.

    On another level, the failure to come to terms with Greece symbolizes an existential failure of the European project. Centuries of horrific, internecine wars provided the impetus to create an economic, political and eventually, social union among dozens of disparate national and ethnic identities. Rather than compete economically or, worse, militarily, the fortunes of members of the European community would rise and fall together. Prosperity is the central, explicit raison d’etre of the European Union. It has not worked. Some countries have prospered, many have regressed, the remainder have stagnated.

    Germany wants to make sure that debtors pay a high price for not complying with the harsh conditions imposed by creditors. But Germany, the largest beneficiary of the Union, has the most at risk if the community unravels. The rise of anti-EU political parties across Europe, not just in Greece and Italy and Spain, but in the UK, Poland, Hungary, the Netherlands, France, and elsewhere, cannot be easily dismissed.

    On one level, the fate of the Greeks, not even a blip on the world economic radar, is unimportant. On another level, it portends a monumental failure of the European experiment, with grave consequences for the world. The path out of chaos is not yet evident.

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