As I wrote in my previous post, I just returned from Greece. There seemed to be no crisis. The people were happy, enjoying, slightly worried perhaps for pensions, but nothing more. When I watch the news, the background building is the Greek Parliament at the Syntagma Square. All the crowd gathers there
The crowds you see are in support of not having any austerity measures and want the merrymaking to continue. So what’s this Grecian Tragedy unfolding? And what are implications for us investors?
The problem is very old and simple, my dear Watson. More debt, less income. And now, inability to pay that debt. Were it Hitler, instead of Merkel, in lieu of the debt he would have captured Greece and made it his colony. Don’t be alarmed at this suggestion of mine. That’s how debt is cleared in the real world too. If you can’t repay the housing loan, the banks repossess it. If it’s a car, they come and take the car. You have a collateral when loans are given to individuals. With Governments and countries there is no collateral except for a promise. And Greece has said in the referendum, NO we are not going to pay. Fu$k U.
The story goes like this.
Greece should not in the first place have been admitted to the European Union. They had fudged their economic position, or probably the Government was misled about their liabilities and debt. Some even say, the government was so lackadaisical, they did not themselves know the extent of the debt way back in 2002. So, EU invited a country not fit to sit on that table. Greece had debt more than its GDP. Having debt more than GDP is not new. Japan has it. USA has it. But they can print their own currency and devalue their own currency. Greeks can’t print Euros. Because it affects 28 other nations also.
Now, this problem was known since 2009, after the sub-prime crisis, that Greece has a huge debt. Nobody did anything about it. Successive Greek Governments, never thought of repaying that debt. And mind you, by 2012 the debt was approximately 360 Billion Euros. Greece’s current GDP is about 245 Billion Euros. A good government would have told the people, that there is a huge problem and to repay the debt there are only two ways— either earn more, or spend less.
The Greeks did nothing. Neither did they reduce their expenditure, nor did they increase their income. So, they went from bad to worse. All the while, EU kept bailing them out and postponing the inevitable. The biggest lenders are Germany, France, European Central Bank, IMF and Greek Banks. So, the losses will be sovereign losses, i.e governments will lose money, which is actually tax payers money of countries like Germany, France etc.
Now to increase the income, one method is that the Government can increase taxes. But Greeks are like Indians. One of the biggest tax evaders in the world. The only people who pay taxes in Greece are the private sector employed people. The self employed like restaurant owners, grocery store owners etc, take cash and do not disclose income or fudge their income, thus escaping taxes. They can also retire at 50 yrs of age and then claim pension. Compare it to Germany, they have increased the age of retirement to 67 years. The Greeks survive on two sources — Shipping and Tourism. Shipping incidentally is tax free. And tourism, is generally self employed sector, which does not disclose correct income. Jayen toh jayen kahaan, samjhega kaun dil ki zubaan…..I am reminded of Talat Mahmood, SD Burman, Dev Anand in the movie Taxi Driver. The black economy is approximately 45% of GDP. Some of you must be smiling and saying, “I’m loving it”.
Government servants are highly paid. They earn an average 65000 Euros a year. To give you an example, the employees of Greek Railways, earn Euros 60000 per year. Even the cleaner. The annual revenue of Greek Railways is 100 million Euros and expenditure is 400 million euros. Jai Ho. A deficit of 300 million Euros from only one agency.
The entire black money is circulated in real estate. Deja Vu !!! Like India. Pensioners have a ball. A lot of them can retire young. They get 12 cheques a year as pension and a 13th as bonus. Wow! I should have stayed put in Greece. I travelled to Kiffisia a suburb, north of Athens and to Glyfadas a beach suburb to the south. It did not seem like a country in the grip of a crisis. Champagne and Caviar. Ferraris and Ducattis. Swimming Pools and Yachts. That was the life style, and then the Greek government tells the European Union, go take a ride, we are on a big fat gravy train but we can’t raise taxes.
The heroes are the Prime Minister Tsipras and the Finance Minister, Yanis Varoufakis, removed yesterday. He was elected in Jan 2015 on the election plank of no austerity measures and no cuts. So he along with the Prime Minister were the so called, radical leftists, who were not interested in clearing the debt.
What is the way ahead?
Greece’s present debt will have to be written off by the EU. There’s no other way. Or else, they have to reduce the interest rate, give a longer term for repayment. But it creates a bigger problem of other countries following suit.
Greece ideally should be thrown out of the EU, asked to print its own currency, which would be sharply devalued and fend for itself. But here, the sunk cost fallacy, of which I am a fan because I see it every day around me at work, comes into play. The EU leaders know, that if Greece exits, and other countries also leave the EU, then the idea of EU and a Eurozone with free trade, which they took efforts to build would make it look like a stupid idea. And nobody likes to be called stupid, nobody ever wants to tell the Emperor that you are not wearing any clothes.
What Impact will it have on Indian Markets?
A bit. Mainly because liquidity will be tight. Nobody will have money to lend, or if they have, they will not like to lend. Money deployed by FIs in emerging markets may temporarily move out. So, there could be a buying opportunity for Indian Investors. Other than that, I may appear to be stupid. I travelled to Greece in June 2015. If Greece exits the EU, it will make so much sense to go to Greece with a Drachma which may be at 50% of the value of Euro. Yes, that’s the kind of devaluation which may occur.
But I and my Greek friends, may still have the last laugh, Greece won’t exit EU and EU leaders will not allow Greece to leave. So, Yassu or Yamas, ie cheers in Greek.
Just Keep your buy list ready, it may come in handy. I will pounce on Thomas Cook below 175.