Gold News

Beyond the Bailouts

Greece is back. No one is happy...

SO GREECE has returned to Europe's center stage this morning, writes Eric Fry for the Daily Reckoning.

Hardly anyone is happy about it. Most investors were pretty content when this "Debbie Downer-opoulos" of the European financial markets disappeared behind the curtains for a while.

But Debbie took the stage again Sunday when the left-wing Syriza party gained a surprisingly large number of seats in Parliament. The leftists hope to form a coalition government that would nationalize banks, repeal recent labor reforms and immediately cancel the bailout accords with the European Union and the IMF.

In other words, these politicians are threatening to undo the very austerity measures that the EU and the IMF adore. Whether or not such "leftist reforms" would benefit Greece, the idea that the Greeks would unhinge their EU shackles is worrying investors.

The major European stock markets fell — pushing several stock indices on Europe's periphery deeper into the red for the year. The Spanish, Italian, Portuguese and Greek stocks markets are all showing losses for 2012. Looking back over the last 12 months, all four of these markets have tumbled at least 33% in Dollar terms.

For a fleeting moment earlier this year, many investors placed the Eurozone crisis in the past tense. But now it appears that the crisis is very much in the present and future tense. "Euro Near Three-Month Low on Greek Leadership Concern," a Bloomberg News headline declares. "Alexis Tsipras, whose Syriza party placed second in Greek elections on May 6...said he wouldn't agree to join forces with New Democracy and Pasok, the two Greek parties that have supported austerity measures in return for international funds."

"When you have the guy who's supposed to form the coalition saying that there's a moratorium on debt limits," a currency strategist tells Bloomberg, "that the bailout is not necessarily in place — stuff like that is getting people a little skittish."

Indeed...and the skittishness is rippling across the Atlantic. Here in the US, the "risk-off" trade is back on. Stocks and commodities down; bonds and the Dollar up.

These modest signs of investor distress will no doubt inspire renewed bailout/austerity/manipulation efforts by the European and US governments' financial meddlers. As we have observed time-after-time since the 2008 crisis, there is no economic downtick that is not simultaneously a call to action — a call to government action.

Regrettably, most of these government actions address symptoms rather than the disease itself. They "cure" gangrenous limbs with Lidocaine rather than amputations. As a result, a smattering of politically connected banks and corporations feel better, but the overall economy remains deathly ill.

The European interventions of the last two years tell the tale. Northern European taxpayers have sent hundreds of billions of Euros to their southern neighbors, while the European Central Bank has printed more than €1 trillion and funneled most of that money to large European banks. As a result of all of these shenanigans, many large European banks feel much better. But millions of taxpayers are poorer... and the Greeks themselves are no better off.

In 2010, before the first bailout, the Greek government owed about €310 billion, all of it to banks and other members of the private sector. Today, a whopping 73% of Greek debt sits on the books of the European Central Bank, Euro-area governments and the IMF. And by the time the EU and the IMF finish sending their bailout Euros to Greece in 2015, Greek debt will total about €316 billion, close to 100% of which will be held by the ECB and other government agencies.

In other words, the Greeks' monstrous government debt load would be just as large in 2015 as it was in 2010. But government agencies would be on the hook for those debts instead of European banks and other private investors.

Is this really a remedy? If so, for whom?

This sort of remedy rewards imprudent banks, punishes taxpayers and condemns the Greeks to years of indentured servitude. And it probably condemns the entire European economy to a sustained period of slow-to-negative growth.

Unfortunately, while such governmental "do-gooding" almost always fails to restore health and viability to a sickly economy, it almost always succeeds in nourishing a lot of "do-badding." By rewarding imprudence — over and over — government-sponsored bailouts encourage bad behavior...over and over.

Buying Gold?...

Eric J.Fry has been a specialist in international equities since the early 1980s. A professional portfolio manager for more than 10 years, he wrote the first comprehensive guide to American Depositary Receipts, International Investing with ADRs. Today he reports on Wall Street from California for the renowned Daily Reckoning email service.

See full archive of Eric Fry articles

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