Austerity Can Only Go So Far

05/04/2012 9:45 am EST

Focus: MARKETS

Danielle Park

President and Portfolio Manager, Venable Park Investment Counsel, Inc.

The populations of the debt-ridden Euro countries are reaching a point where they can’t survive on any less, and debt holders will have to eventually accept their losses, says Danielle Park.

My guest is Danielle Park. Today, Danielle is going to talk to us about government intervention—good, bad, or not. Right now, we’ve had so much liquidity pumped into the markets by governments all over the world, and it doesn’t seem to be stopping…

Yeah, it doesn’t seem to be stopping. But you know, there’s a finite amount of pumping that anything can do, any one entity.

I think that what you’re seeing now with the Europe crisis, for example, is that the appetite to continue in the unfettered flush of money down the toilet is now receding. You see, for example, countries like Germany and some of the payer countries for this bailout fund starting to say, "Listen…"

Just as you would to any teenager in your family that kept taking, taking, taking, and not exercising control on their spending, you would hit a wall where you would say, "You know what? I’ve tried to help you, but you need to get some discipline over what you’re doing and what you’re spending."

I think that the mistake, though, is not that they expect certain countries to spend less, because I believe that’s the rational course back to solvency is to spend less and let your economy build up some buffer again. The mistake is that they’ve tried to protect the banks without losses to date at the expense of the real economy.

So it has to be a universal sharing of pain, in my view, because what happens is you get societal unrest—let them eat cake doesn’t work when you get to a certain point where people just can’t survive on less—and I think you’re seeing that in countries like Italy, Spain, and Greece.

The religious leaders are coming out and saying, "Listen guys, we have more than 20% of the population unemployed, people are having a hard time getting a meal, and you’re talking to us like we can all take another 20% cut in wages." Some of the Greek people haven’t been paid in a year, so they’re saying "Cut? Cut what? I haven’t gotten income for a year."

So when you’re at that point, when you’re that close to the bone, you have to do something else as well. And that something else is you pay back a fraction of the money that was borrowed. That means then the wealthy peoples’ funds, institutions, and pensions that are holding that money have to admit losses, have to admit that they made mistakes, that they shouldn’t have bought as much in bonds from those spendthrift places.

Do you see that happening in real life?

Yeah, I do, I do. I’m seeing it happening right now. The latest incarnation of the Greek proposal is a 70% haircut. We knew that was coming when they were talking about we wouldn’t take haircuts.

That was two years ago, they won’t take haircuts, and then it was well, they’ll take 20%, and then it was 30%, and then it was 50%, and now it’s 70%. It’s just math…and it can’t be paid back. There’s not enough money, and at some point, if a person is down to a t-shirt and a pair of shorts, they don’t have anything more to give you, right?

So, that becomes your fault, your problem. You now can’t get all that money back, and that rationalization through the system where everybody lowers expectations, writes down assets that are overvalued, and finds pragmatic ways to get back and get some income is the solution.

It’s not the wrong path. It’s the correct path, but it’s not that pleasant or comfortable.

Right. Not easy, but that’s where you go up from that point and that’s when you have hope again.

Exactly. You get lean and mean, and then people have surprise to the upside after that.

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