Referring to the logic behind the European Union’s desire to bailout its original bailout plan for Greece, Wall Street economist Robert Brusca recently sent out an email with the following subject line: “It’s Greek to me.”
It’s an obvious joke. Nevertheless, the point should be well taken. As the outspoken U.S. market watcher pointed out in his note, the question with Greece is not whether or not the nation’s sovereign debt issue is a can that will be kicked down the road by the EU, International Monetary Fund and European Central Bank. The real question, he says, is: “Down the road, who will get their can kicked over Greece?”
Kicking a sovereign debt issue down the road by piling more debt on an insolvent nation only makes sense when you don’t have what it takes to pay the piper now and don’t know what else to do. That’s the Greek situation. This is so obvious to market watchers that CNBC’s recently solicited alternatives to the term “kicking the can down the road” from Squawk Box viewers.
Mohamed El-Erian, the influential CEO of PIMCO, says in a related commentary that he liked “postponing the day of reckoning” and “delaying the inevitable” and “extending and pretending.” But his favorite alternative phrase is “pushing a snowball down the hill” because “it captures more than just the notion of delay. It also indicates that the size of the underlying problem gets bigger in the interim; and the phenomenon itself accelerates.”
Knowingly doing something that makes a serious problem much worse sounds ridiculous. Then again, common sense rarely plays a role when the world economy is facing problems that everyone with skin in the game jointly decides to ignore en masse until a reality check is forced by Mr. Market. And that happens all the time.
Simply put, when it comes to the EU’s response to Greece, desperation has logic pinned to the floor. Here are three examples:
1. Look at the ECB. In order to stabilize the euro zone and save institutional investors (read French and German banks) from taking loses on Greek bonds, the central bank has put its own books at risk by exposing itself to Greek bonds.
2. Look at the European Financial Stability Facility. After pretty much every member of the EU openly ignored the monetary union’s debt and deficit limits, the EFST was created to providing temporary financial assistance to euro zone counties that are experience the most difficulty. It has €440 billion at its disposal. But that money comes from governments that are also borrowing to survive, including the most troubled ones. Believe it or not, 37% of the EU’s stability fund is guaranteed by the so-called high-risk PIIGS (Portugal, Ireland, Italy, Greece and Spain).
3. But the prize for not making sense in this contest goes to Greece. As you may have heard, the local population has been outraged by the asset sales, spending cuts, tax increases and government downsizing that are required to keep the EU’s game of musical bondholders from coming to an abrupt end. After protesters recently tossed home-made bombs at the finance minister responsible for writing up the nation’s austerity plan, the government responded by firing the finance minister and naming a new one—who is now responsible for enacting and maintaining support for harsher austerity measures.
Now, let’s not be too hard on the Greeks. After all, Aristotle gave us the world’s first treatise on logical reasoning. So what Greece giveth, Greece can taketh away.