Greece Is on Fire…Is DC Watching?

06/16/2011 9:50 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

A year after endorsing austerity, most Greeks would now prefer default. But Washington has yet to smell the tear gas, writes senior editor Igor Greenwald.

From New York to London and Hong Kong, one word hangs like a pall over markets in full retreat.

Greece, a nearly bankrupt land with a population of just 11 million and a police force barely big enough to contain anarchists, is on the lips of every motivated seller out there.

How did the cradle of philosophy and democracy become a symbol for street violence and debt default? By taking marching orders from foreigners who promised to rescue it with additional loans.

In early 2010, 65% of Greeks were telling pollsters that their government’s austerity plans were necessary. Then Greece’s European paymasters insisted on even more drastic cuts. These proved transformational—transforming a stagnant economy into a hemorrhaging one with 16% unemployment.

Now 75% of the Greeks polled say “the government measures are wrong.” And many of them have been out peacefully protesting, while the fringe has brawled with riot cops and tossed eggs at the limousines carrying politicians.

With popular support crumbling, Greek Prime Minister George Papandreou briefly engaged the opposition in unity talks, offering to resign so long as the next prime minister continued seeking a bailout in exchange for further austerity. The opposition is insisting on a renegotiation with Europe demanding easier terms, so talks went nowhere and Papandreou now plans a confidence vote in parliament for his reshuffled cabinet.

Confidence is about the only commodity going up in price, because supply has been severely curtailed. European banks are undercapitalized relative to their US counterparts—counting the sovereign debt on their books as less risky than mortgages, for example.

A Greek default would expose that fiction, and send investors running from the bonds of Ireland and Portugal, as well as banks in Spain and maybe Italy. Europe would then be facing its own “Lehman moment,” but with a much less proactive central bank and squabbling governments trying to pass the buck back to it.

The surprising thing is that anyone is surprised, since large majorities of investors have been telling pollsters for more than a year that they expected Greece to default. Papandreou never had a chance, having taken up German advice to flay the economy in order to save it.

The other surprising thing is that the smoke from Athens, so easily discernable on stock exchanges around the world, has still not penetrated Washington’s swampy air.

None of the Republicans negotiating the extension of the US debt ceiling could stomach anything as drastic as the cuts Greece has already endured. And they’re certainly not advocating any new taxes. But otherwise their calls for drastically lower spending are strikingly similar to the German prescription for Greece.

Here’s hoping the end result is different.

As for Europe, it arguably has financial speculators where it wants them: anticipating the apocalypse any minute. The multinational elites can only compromise in the shadow of a catastrophe these days.

But just in case their next stopgap wheeze doesn’t do lasting good, here’s a potential short to make the intervening gyrations more bearable. The iShares MSCI Europe Financials Index ETF (EUFN) holds stakes in all the institutions that can’t afford for Greece to clear the decks.

It’s down 12% from the end of May, but still 24% above the lows from a year ago. And it could get back there in a hurry one of these days.

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