Focus is changing to Europe. Events are happening there at lightening speed. From the recent assassinations in Paris to Greece and to Brussels, the headquarters of the Eurozone. So – let’s take a closer look at the events in Greece.
Focus on Greece
To understand some of the political machinations within the Eurozone we must review the structure of the Euro. The Euro was designed as a single currency with the goal of uniting the countries of Europe and making it a single trading bloc to rival the United States and Asia. The Euro was to “level the playing field” among the various countries in Europe. Each country was allowed to issue its own Sovereign Debt. The result was that each country issued bonds with its interest rates fluctuating based on the perceived strength of its economy. Germany, the strongest economy, has 10 year bond rates at .51% while Greek bonds are at 10%.
When the crash of 2008-09 occurred deficits began to accumulate. Bailouts were initiated by the European Central Bank (ECB) and the International Monetary Fund (IMF) with the condition that they would follow the austerity guidelines that were set up. The underlying problem was that unlike the United States that has only one government bond, the Eurozone has bonds issued by all the countries in the Euro. There is “cross pollination” meaning that countries could buy each others’ bonds.
The austerity measures imposed by the IMF and ECB have been exceedingly harsh on the Greek people. Pensions were eliminated or cut and there is widespread unemployment. This has led to growing civil unrest among the Greek people. Greek Prime Minister, Antonis Samaras was unable to find support for his candidate, forcing general elections to be held on January 25, 2015. A leftist party called Syriza has taken the lead under Alex Tsipras. The key points of Syriza’s platform include: Higher wages and a write off of some Greek debt.
German bankers are now shaking in their boots. They are afraid that Greece will leave the Eurozone and default on its debts. Germany’s liability of Greek debt is $92 billion.
Here are some excerpts from Alex Tsipras’ speeches: He plans to write down most of the value of Greek debt once elected. “That’s what was done for Germany in 1953.” “It should be done for Greece in 2015.”
“The solution is balanced budgets to strongly limit the need to borrow.” “Holding to a budget balance goal is really a key point in our strategy, as it gives us the possibility to negotiate from a strong position. That said, we need to say that budget balance doesn’t mean resorting to austerity per se.”
“The goal is to create a majority of social forces where the Left can be the main actor that will be able to play a fundamental role in changing citizens’ condition.”
What does this mean for investors? The plunging Euro tells the story. At mid-year 2014 it was trading at $1.40. Since this crisis has emerged it has fallen to $1.18 with no bottom in sight. One of the best currency trades of 2014 was short the Euro and long the US Dollar. European money is leaving Europe and moving into the US Dollar and US bonds and stocks. Given the chaos that would follow a Greek default, this trend of finding shelter in US investments shows no sign of abating.