• 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: 06-29-2015

Here we go again, as Ronald Reagan used to say. Asian equities off 2-3%, Europe down 3-4%, Treasuries rallying, gold up. What’s going on?

The latest act of this tragedy was the imposition of capital controls and the closing of banks in Greece. These acts were logical following the ECB’s decision to continue to provide emergency funding to the Greek banking system, but capped that funding at the 89 billion euros it has already lent. That’s enough to keep the banks afloat, for now, but not enough for Greek banks to meet any deposit withdrawals which, as you might imagine, have been accelerating in recent weeks. Hence, the closing of banks and imposition of capital controls yesterday.

So that’s the most recent development in this saga. Greece owes the IMF 1.5 billion euros tomorrow, which it won’t pay. That is no big deal, as the ECB has signaled it will have no bearing on its own negotiations. For the IMF, it just means that Greece will go into arrears (joining stalwarts Cuba and Zimbabwe).

Next up is Sunday’s plebiscite on whether to accept the latest European proposal, which the government is urging voters to reject. They will. Then, there’s 3.5 billion euros that Greece owes Europe on 20 July which, of course, they don’t have.

The morality debate that infuses this drama is (possibly) interesting, predictable, emotional and irrelevant. Europeans (Germans, really) will argue that Greece borrowed tons of money to finance its profligacy, absence of work ethic and wholesale evasion of taxes. All true. Greece’s narrative is that the Germans are no better than drug dealers, pushing their products with cheap financing in order first to boost their economy and then to impose harsh economic conditions on naive and helpless Greeks. Partly true.

I have (some) empathy for Greece, as it has borne a 25% cut in GDP, 50% unemployment and a fiscal budget that is now close to structural balance. These adjustments are greater than the US experienced in the 1930s. But realistically, Greece is a basket case on so many levels. Greece needs to slash the size of government, cut regulations and taxes to encourage growth, but this new government is a far-left extremist party that wants to maintain retirement benefits through higher taxes on the private sector. They’re idiots (economically, that is). No one in their right mind would extend more credit to these clowns.

But it doesn’t matter what I think. It actually doesn’t matter what anyone thinks because the facts are irrefutable. Greece’s GDP is about $250 billion, and its outstanding debt is about $350 billion. There is not only no cash to make interest payments, there is no prospect of being able to do so. The debt has to be restructured, which means reduced and extended. There is no alternative. Greece cannot be forced out of the euro. The only issue in play is the conditions under which this restructuring will occur. It can be orderly, with both parties making concessions, or it can be messy. The one thing it cannot be is avoided. The drama continues.

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