The Solution to the Greek Crisis - Buy Greece!

Since the advent of the Euro-zone and the Euro, there has been a noticeable absence of solidarity among Europeans around the future of Europe. If this is heresy, so be it. Will Greece’s politicians survive the confidence vote to continue the good fight?

by DOM J. RODRIGUEZ*

It has taken a significant economic crisis to crystallize the heightened awareness of all of Europe to the underlying problem: a lack of unified purpose and common objectives across the continent when it comes to dealing with the financial crisis of its weakest members.
Instead, what the world perceives is a continent that bickers, makes excuses, and points fingers regarding who works harder, who is more fiscally responsible, and who manages their debt poorly.
This internal friction within what is supposed to be a “federation” or “union” of countries who joined forces to leverage the combined might of their economic strength – thereby making them a serious player on the world stage – has led to a few actors looking to hog the stage: mainly, Germany and France (an odd alliance given their polar opposite conservative and socialist roots).
The question is: Is this leadership or is this the absence of solidarity?

At the risk of offending the venerable institutions of the European Union Commission, the European Central Bank or the International Monetary Fund – whose combined unity of purpose is meant to preserve and protect the safety and soundness of its member states’ economies – to the outside world the only thought that comes to mind is: this is “political theatre” at its worst. It is less than ironic that Western civilization’s birthplace of theatre should be the source material for the drama being played out by European politicians and bankers.

There are of course sound bites which sound good and leave some with an impression that these politicos and wise men at the central banks have a firm understanding and the “right” solution to the crisis in Greece, viz:

“They need serious structural reform.”
“We (EU/IMF) need to avert the risk of contagion to the rest of Europe and the world.”
“Germany gives nod to (voluntary) restructuring.”
“Greece needs to fast track asset sales and cut spending.”
And from the pundits: “There is still a risk that even with all the measures Greece is taking, there will be a default.”

Tensions have run high and couldn’t be better exemplified than by the sheer number of solutions that have been presented and which quickly fade into the clouds like trial balloons that escape gravity. Depending on the day, the probability of Greece defaulting has been as high as 75% or even - to some skeptics - a foregone conclusion.

Let’s review: the EU/IMF have approved providing Greece with €12 billion in July under last year’s €110 bailout package subject to Greece’s Parliament passing fast track legislation for privatization of state assets of €50 billion and increased austerity measures of €28 billion.

This not only has to be approved by Parliament but then implemented. The market’s reaction continues to be skeptical on whether these measures will be successful in forestalling a default and of course there continues to be populist backlash. Simply stated: people are rioting in the streets and this is broadcast around the world every night on the news.

So the markets are left to ponder (or speculate) on whether the current proposed solution will work and correctly address the risk of default and provide the “right” political, fiscal and social solution.
But will it? Will more pain for the Greeks (ie, lower public spending and social benefits) lead to stabilizing the economy (ie, increased productivity and GDP)?

Look at one statistic closely watched by the market: will income (GDP) exceed spending? Given that currently it does not, the political solution offered has become that spending should be target of the forced austerity measures.

As many during and after the financial crisis in the US concluded: one cannot “cut one’s way to prosperity.”

Surely, reduced spending is necessary in order to attempt to stop the bleeding (deficit spending) but the long term solution for any individual, company or country needs to be to grow income – not just to cut spending. This is the only way to restore vitality (and confidence) – to stimulate or generate growth.

How can this be done? And should Greece go it alone?

Isn’t Greece’s current crisis a “call to arms” of sorts for Europe?” Even the pundits are saying, what’s bad for Greece is bad for Europe. Therefore, the converse should be true as well: what’s good for Greece is also good for Europe - and by extension, the rest of the world. If a default by Greece would lead to global contagion (as some are saying: Greece could be Europe’s Lehman!), then shouldn’t the solution be a wake-up call to the people of Europe?

THE LONG TERM SOLUTION

So what is the solution? What can Europeans (and the world) do to help? Simple. ”Buy Greece.”
No, not the bonds. They are already spoken for. And not, the “soon to-be-privatized” assets either – those will have their buyers too (remember, it’s a fire sale!).
Instead, buy Greece’s goods and services. That’s right. Buy their products and stimulate their economy.

And start with Europe. Even if discounts are given as incentives to European consumers or travelers, the immediate impact to GDP should be significant. The long term solution is one that is universal.

Recall the Asian crisis, when the citizens of South Korea contributed their gold to boost the country’s reserves and as a gesture of support for their beleaguered economy.
Recall the U.S. financial crisis, when the Treasury and Federal Reserve asked Congress for a blank check (aka: TARP).

How was the TARP used at the height of the panic to arrest the systemic risk in the banking system even when that blank check was not enough?

The U.S. government bought the capital of the top banks in the system (whether they liked it or not) – thereby replacing their guarantee to fund under the TARP with actual funding.

Then, the U.S. proceeded to “stress test” the capital base to demonstrate that it was enough to forestall the systemic crisis. Slowly, the panic subsided. Expenses were cut. Capital was injected. But income (from lending) was flat due to the recession (i.e.: a pullback in capex and working capital from the banks due to insufficient consumer demand) - even though there was not a shortage of capital adequacy in the banking system. So what was accomplished? The crisis was averted.

Back to Greece, the question is not whether this is a liquidity crisis wrapped within the banner of certain default. Or whether it is a solvency crisis wrapped within the banner of a liquidity crisis.
Most take the view it is a solvency crisis (ie, inability to meet obligations as they come due today and into the future).

Again, this can be viewed as analogous to capital adequacy in the banking system.
How so? Banks can’t actually repay their depositors or funding as obligations become due – they in fact rely on the market’s continued confidence to rollover their investments.

So who wants to continue to rollover Greece’s sovereign debt when they (apparently) don’t have the capital adequacy (i.e.: earnings capacity) to meet their obligations as they come due?

We come full circle to the income part of the equation as earnings capacity would be defined as that surplus or deficit after meeting current period expenses (ie, current period budget).

If we attack expenses only and income continues to contract or remain stagnant (based on current year actual performance and consensus forecasts), the situation will only improve if exports were to flourish and inbound investment were to increase in order to promote and stimulate the domestic economy (ie, increased capacity utilization and job creation).

Europeans should answer the “call to arms” and “Buy Greece.” Buy Greece’s olive oil, their wine (it’s actually award winning), their cheese, and their yogurt.

Greece has always been a renowned travel destination. Go there and pump Euros into the economy.

If Europe overwhelmed Greece with demand for its goods and services, even after a healthy discount, we are confident Greece would step up to meet the demand.

ADDRESSING SYSTEMIC RISK

The backstop that is needed for the markets to make the crisis go away is not a cram-down for private creditors (since rejected and replaced by the voluntary roll-over plan, but still) or unsustainable (let alone unpopular) austerity measures, but rather growth in income as argued above.

Greece, like any other sovereign nation and developed economy, wants to be the master of its own destiny.

The current bailout terms approved by the EU/IMF proscribes doling out capital in stages and insisting on Greece meeting its targets (not all of which are within its control). With asset sales at fire sale prices and cutting expenses to the bone, this is viewed as prolonging the inevitable.

Why not take a page from the US playbook? (Warning: it’s radical!) Issue the blank check (yes, in this case, the second one, but one could argue the first one was not big or bold enough) and use proceeds as follows:

1) Provide an adequate cushion. The amount of new bailout plan for Greece should be sufficient to provide the liquidity cushion for 2012 and beyond (ie, until growth is clearly evident over an extended period). The current proposed amount is €100 billion but there continues to be uncertainty as to whether this is sufficient based on the unpredictability of Greece’s economic outlook (read: stabilize and grow) and ability to reduce spending.

2) Remove conditionality. While we cannot revise the current proposed plan, we would suggest that the markets do not like uncertainty. Performance can be tracked to targets (income, expense, privatization) but ideally removed as a condition to funding.

3) Invest in the “to-be-privatized” assets. Europe should in effect make a market in Greece’s equity (ie, assets to be sold) in order to establish a floor and to maximize price.

4) Buy into the private sector. Go further and buy into key industries such as the banks, shipping, and even tourism and agriculture. All of the private sector will have excellent uses for that capital.

5) Provide increased financing for Greece’s exports. Similar to existing EU programs supporting investment/development of green (alternative energy) initiatives, in order to promote trade with Greece, provide financing to either build/develop export capacity or finance the working capital to exporters or buyer financing for Greece’s exports. This is similar to the way some Latin American countries were able to regain their footing after their respective sovereign debt crises: by boosting exports.

6) Attack inefficiencies in public sector productivity, tax collections, social benefits, over time, etc… in a measured way. Even in the U.S., fixing the banking system, healthcare, social security, and the economy (jobs, growth) all at once is not considered very practical. (Idea for tax reform to improve tax collections: maybe phase in higher sales taxes in place of income taxes?)

7) Promote the “Buy Greece” campaign. Start a movement to buy Greece’s goods and services first in Europe, then other parts of the world. Discounts offered to Europeans over the rest of the world. It’s okay to be Euro-centric in this case.

8) Watch Greece as it regains control of its destiny and grows to prosperity again!

CONCLUSION

Unless the European people and its institutions move beyond their political differences and towards a long term solution for the common good, Europe will only be as strong as its weakest links. Europe should seize the moment to join in solidarity and look towards Greece as a buying opportunity!

* Dom J. Rodriguez is Partner and Director of Sales at "Nova Capital Partners, LLC" www.novacapitalpartners.com

The Solution to the Greek Crisis - Buy Greece! - Business - EBR