For want of a baker, a job was lost. For want of a job, the economy was lost. For want of an economy, the banking system collapsed. For want of a banking system – well, ultimately Grexit.
Grexit, Grexit, Grexit, Grexit, Grexit, Grexit, (China), Grexit, Grexit. The Greeks will be fine, right? There is no such thing as contagion, right? Your lips to God’s ear, please. As I write this, the Greek Parliament has approved the bailout and it looks like an immediate Grexit is off the table, (although the Germans are none too pleased)! Wonderful.
Dechert hosted a meeting in London last week, together with the principal law firms of Ireland, Italy, Spain and Greece (Arthur Cox in Ireland, Garrigues in Spain, Grimaldi in Italy and Karatzas & Partners in Greece). The point of the meeting was to talk (okay, to drink some), to socialize, get and to share insights and observations about Pan-European opportunities and risks. It was a great success. Let me tell you, talking to the Greek lawyers was a real eye opener. It’s one thing to read about the slow motion disaster which is Greece in the papers; it’s very much a different thing talking to people who are actively dealing with it day to day. How do they make payroll? How do they get paid? How do they advise their clients? It’s a chilling problem when you confront the real human beings stuck in the chaos in day to day life.
This is a solution?
Adult talking heads seem to be convinced that there would have been no contagion even if Grexit occurred and hey, the crisis is over, right? The Greeks can continue their current welfare state charade indefinitely, and so it seems to be. Do we seriously think this is a solution? You’re going to cure a debt problem with more debt? A hundred billion dollars in loans will do what? No debt relief at all? It may keep the enterprise afloat; it may send the piper packing for a bit, but paid he will ultimately be.
The problem, of course, is that all these plans to save Greece’s place in the Euro depend on the Greeks becoming German (or at least French or even Italian or Spanish for God’s sake). Does anyone think this is going to happen? Does anyone think that absent serious social and political disruption that the Greek way of life will change as long as the can can be kicked down the road?
Call me cynical, but do we really think the Greek people will broadly embrace the joys of longer working hours, delayed retirement, economic independence and entrepreneurship, tax probity and economic and social reform? Not happening. No amount of EU fiddling with the balance sheet or finger waggling is going to remake Greece without massive social and political disruption. Does the EU want to be the father of that feast? It seems that between confronting an unpleasant change now and confronting a truly horrible situation down the road, down the road won out.
The straw before the straw
Much like mad Uncle Billy who is locked in the attic when the neighbors come to visit. It will end badly. But, of course at the end of the day, Greece is such a very small place, so who cares?
I think we should. This current chapter in the Greek travail may not light the fuse for something larger and more disruptive, but it certainly seems to set the table for something that will follow. The straw before the straw, so to speak. I am pretty sure that this Greek debacle makes it more likely that some other event will happen (and maybe it already happened, think China?) that will light the fuse of significant contagion. Nothing is local anymore. It is a butterfly wings world. The world financial system is a gigantic confidence game and the conviction that trades will clear, that debts will be honored and money is money underpins the entire system.
Okay, but besides gloom mongering, if I am right, does it lead one to any executable action steps? I think it does.
Here are some:
- It’s a good time to be a borrower.
- It’s a good time to hold real assets.
- It’s a good time to be short.
- It’s a good time to have a defensive balance sheet.
- And it’s a good time to have a fair amount of dry powder.
If things begin to shake loose, we will again struggle with the question: is this an opportunity or is it a falling knife? Sometimes, though, opportunities really are opportunities. The business of trading NPL portfolios will be back. Banks under stress will fail and ultimately assets will be dumped again. Shadow banks, outside the bear hug of the regulatory community will succeed, will fail, and will succeed again.
The enormous regulatory construct that was theoretically designed to make the banking system and the financial system safer will turn out to be an accelerant when the spinning top begins to wobble, and contagion becomes real.
Look, this may all blow over and I can put this commentary in my Chicken Little file, but I think it’s worth considering that if a system that has only just recovered from the travails of 2008 continues to take body blow after body blow, we could be closer to bad things than we think. This would all make a terrific novel, but it makes a pretty scary reality.