In our highly interconnected financial world, what happens in Europe, Greece, and Germany greatly affects our own bond and MBS markets.
There has been much discussion back and forth of who is to blame for the Greek crisis,
massive debts in other Southern Euro countries and what to do going
forward to solve this problem. First of all, I do lay some blame on
previous Greek governments for previous massive borrowing, government
corruption and also the Greek “elites” who find ways to not pay their
taxes. But, I put more blame the large Northern European bankers for this crisis for making these ill-advised loans
in the first place without proper due diligence. They (bankers) were
pushed for these loans by the very same German and other Northern Euro
governments themselves to prop up their own economies and banks’ balance
sheets by loaning billions to poorer Southern Euro countries to open up
newer markets for their own exports and profits.
Sound
familiar? (US mortgage crisis evolved with ill-advised home loans
pushed by wall street.) The “grand” answer from German officials is a
grand theory called "Austerity". It is a nice word and sounds
good in theory, but in economic practical use, Austerity during a period
of financial deleveraging, deflationary and shrinking GDP economic
current climate does NOT work. In fact a country’s debt-to-GDP ratio
rises rather than falls. Southern Europe’s countries now have falling
GDP’s, higher debt –to-GDP % and outright deflation and have “Austered”
themselves into a depression, resulting in mass unemployment, extensive
poverty, and falling confidence by their populations.
Germany and
other Northern European leaders must somehow come to
understand that the real threat today is not from economic issues for the EU, but from the political
unrest caused by the crushing burden of foreign debt, especially in
Southern Europe. This has led to new left wing political parties such as
Syriza Party in Greece and Podemos Party in Spain. It is not
too far-fetched to worry about far left wing polarization of Europe that
may eventually unwind the Euro itself. After all, The Syriza party in
Greece came out of nowhere and in only 2 to 3 years defeated the
establishment parties that have led Greece the past 40 years. This is a direct result of the austerity-induced economic
hardship in Greece. Without additional debt reduction or restructuring, the country will likely default on its
remaining obligations. The resulting financial contagion and political radicalization of left wing governments may spell the eventual
downfall of the EU itself.
Germany and other
Austerity minded officials all need to tone down rhetoric and admit
that the Greek bank debt forgiveness and extra bailout loans provided to
Greece so far have largely saved banks in Germany and other Northern EU
Banks via the back door, rather than actually helped either Greece or
Greek citizens themselves. The Greeks have received all the blame for
the crisis. While they do deserve some of it, Northern European bankers were also part of the problem. They should take a page out of our book in considering how they can be part of the solution.
Look back at our own US
Mortgage crisis and ill-advised mortgage loans fed by big banks, wall
street and bond rating agencies. In our case new programs HAMP, HARP,
FED policies and other programs helped millions of homeowners
restructure home debts and other forms of debts to keep even more
foreclosures from evolving. Not to mention the lower costs of other
streamlined refinances to lower debt burdens on millions others
homeowners via lower rates and longer fixed loan terms. What would have
happened here in the US if we took a similar route to European austerity? We barely have a recovery now. Would it have helped to punish underwater homeowners as opposed to work on programs like HARP and HAMP? Would we even have any recovery at all without that accommodation?
Is the current situation in Greece and Southern Europe much different in the broader macro case to our own mortgage housing crisis we went through in 2008? Creditors offered loans they probably shouldn't have. Debtors sought loans they probably shouldn't have, and everyone lost.
My
question is this, will it not make more sense to employ the same type of growth strategies and restructuring programs in Europe? It's clear that strict austerity programs have NOT worked. In fact, they've only made
the situation worse. Pro-austerity officials in the Eurozone need to admit this. No one is suggesting Greece should get a pass for their bad decisions, but as yet, that's only been addressed with more bad decisions from Northern Europe. The entire continent will suffer unless that changes.