That last post.

Some people were irritated.

In the aftermath, I was called a wolf in sheep’s clothing (amongst other things); and the post was called “a rehash of selective information” “which offers no conclusive suggestions as to how to resolve the situation” and “was lacking in certain fundamental areas”.

Which I found to be a bit unfair. Firstly, you’re not really discrediting the argument by calling it names. And secondly, you can’t attack an argument by attacking the person making it. The debating phrase in my head is “ad hominem fallacy”.

Also, to be frank, if patriotism requires me to be blind and sheeplike, then the wolf accusation is a compliment. After all, wolves and sheepdogs are not so different. Shun me as you will; but I like to think that it’s the wolves, not the sheep, that do well in a crisis.

In any case, I was sent a video link that offered an alternative viewpoint (Peter Economides – “Rebranding Greece”). If anyone is interested, you should youtube it – it’s worth seeing a different perspective. Essentially, Mr Economides suggests that Greece has been unfairly singled out in the crisis – and that the Greeks are partly to blame for this. He argues that Greece must rebrand herself if she is to come through this. Mostly, I agree.

But I have some observations:

  1. A branding solution unfortunately does not change the underlying fiscal crisis – in the same way that dying my hair dark is unlikely to help if I’m going bankrupt (even if the bank had a prejudice against blonds to begin with). While it may be necessary in the long-run – as a short-term solution, it requires more than just a change in look – we also need an internal dynamic shift to take place.
  2. As an alternative to the current view that Greece has the highest default risk (a view based on Greece having the highest public-sector-debt-to-GDP ratio), Mr Economides uses a UBS analyst report on the likelihood of sovereign default. The report incorporates the public-sector-debt ratio, the loans-to-deposits ratio, and the credit-to-GDP ratio to create a quantified index of default likelihood. As a general point, incorporating the “loans-to-deposits” ratio of the private banking sector, whilst interesting, is not as relevant to longterm sustainability if it is the government that is going bankrupt. That ratio simply gives an idea of banking sector stress, which is linked to the level of reserves that the Central Bank/Reserve Bank will have available if the bankruptcy goes down today – not the underlying systemic fiscal crisis that will persist over time. From what I can see, the greatest index weighting has been placed on this variable.
  3. In addition, the basis of the alternative viewpoint was a forecast generated by analysts at a bank. Using an analyst forecast to definitively dispute the actual fiscal data can be dangerous. This is not what Mr Economides is doing (he seems to be making a point about statistics and perception); but it is what some people are doing to justify their own views on the crisis.
  4. Incidentally, I searched for this UBS report (the Andrew Cates’ Aggregate Balance Sheet Risk Index) online – and while there is much reference to it, I could not actually find it. So, in all honesty, I am inferring some reasoning. But that said, every article I read that mentions the index includes the caveat that the index does not take into account all factors that affect the risk of default.
  5. Mr Economides states that after the Olympic Games of 2004, “we [Greece] started consuming like lunatics”. This supports my original argument – although I also think that Greece would have been overboard on its spending before this. Olympic Games are not cheap to put on.
  6. The human cost of this crisis is undeniable. But sadly, it is also unavoidable. Pragmatically speaking, any solution will limit rather than avoid human cost. Perhaps there is a certain hardness that comes from having lived through a real fiscal crisis – but people will survive, and will emerge stronger and more rooted in community.
  7. Finally, I was never, at any point, attempting to imply that the Eurozone debt crisis is purely a Greek Debt crisis. But I do agree that it forms the focus of the media attention.

So I’m going to address that last part: why I think it is the Greek Crisis in the news, and why there is the potential for the rest of the world to interpret the Greek debt crisis as the Global debt crisis.

It is because, fundamentally, Greece has the largest relative public sector debt (if we ignore Japan, as the market is doing, for the moment). We are not talking about the “likelihood of default” here – but the magnitude of the problem. And even if we were to accept the conclusions of the UBS report – that report would still lack a fundamental variable (indeed, it is the variable being pushed by Mr Economides): market perception. Regardless of whether it is justified, public perception considers Greece to be the most immediate default risk.

And that makes it the most immediate default risk.

Two broad factors drive a share price: company fundamentals, and market perception. Two broad factors drive the cost of sovereign debt: national fundamentals, and market perception. And easily, market perception is the more dominant: because it thrives on emotion, paranoia, and our deeply ingrained animalistic instinct to stick with the herd.

Given that, the question becomes: what is the market perception concerned with?

Answer: contagion.

  • Contagion is the spread of economic problems from one country into other countries with similar characteristics.

In this situation, a disorderly default in Greece would give rise to a contagion that would spread through the other indebted countries in the Eurozone.

A series of events that we would call “contagion” could be as follows:

  1. Greece defaults on its debt, triggering an immediate downgrading of its sovereign debt to junk status, as well as triggering the Credit-Default Swaps written over its bond issuances.
  2. The ECB, most of the Eurozone Reserve Banks, and most international banks have Greek Debt exposure (ie. they have investments in Greek bonds). If these bonds default, it would call the credit quality of these institutions into question. There would be further downgrades in their credit ratings, and consequent increases in their cost of borrowing.
  3. As the cost of borrowing increases, so the reserve banks come under further liquidity pressure. Any new borrowings will cost more; and some of their current assets would not be paying back expected cash flows (the Greek bonds in default).
  4. Given the recent default, borrowers may be unwilling to buy up new debt issuances from countries with similar economic characteristics to Greece and/or they may not have the funds available to invest in them. This would cause liquidity shortfalls, and an inability of the at-risk countries to roll their debt (ie. borrow new money to pay back old loans – thereby keeping the level of debt constant).
  5. These liquidity shortfalls could result in more at-risk countries going into default.
  6. And so the pressure continues to build as each new country defaults, bringing about further defaults, and spreading the contagion.

So really, we’re all concerned about contagion. And everyone is anxiously looking for the country that will kick it off. Which, at the moment, looks to be Greece in March 2012 (a large number of bond repayments fall due at that point – which is why everyone is so desperate for a deal before then).

The Eurozone solution right now seems to be an orderly Greek default. If the default is orderly (ie. based on the debt negotiations) – expectations can be managed, and hopefully contagion will not spread. A disorderly default, on the other hand, will almost definitely give rise to a free-for-all. Hence the media attention.

So what is the solution for Greece itself?

A miracle.

Because right now, Greece cannot earn in revenue what she already owes in debt, never mind what she intends to spend. I see one of two things happening:

  1. Greece leaves the Euro, undergoes a collapse of her banking sector (bank runs are sure to happen in the period before leaving the Euro), monetizes her debt, and suffers through a period of inflation and/or hyperinflation (it will be her third experience of traditional hyperinflation); or
  2. Greece suffers through the austerity program and recession in the hope that she can stay in the Euro.

Either way, there will be suffering. But austerity is controlled, whereas debt monetization is not. And at the very least, austerity may give some relief in the form of external funding from fellow Eurozone countries.

Finally, I am all for the Greek call to community. We should be rising up: rising up to help the Greek elderly. Because if the Zimbabwean experience is anything to go by, it is the elderly who bear the brunt of fiscal crisis. They are fully reliant on the State, because they are no longer in a position to react.

The Greeks must rediscover their community. If the cloud is to have a silver lining, it is the only way.