The rumoured decision by Greece’s creditors to deliver an ultimatum attempting to force more austerity on an already beleaguered country is likely to cost investors and tax payers here and elsewhere a lot of money. Besides which, it won’t help revive the Greek economy but, rather, shrink it further.
It is unlikely to force a democratically elected Greek government (elected to stop austerity) to impose more austerity on its population. Given that the Greek economy has already shrunk by 25% over the past few years the odds must now be on the Greek Government refusing to bow down to its creditors demands.
Even if the current Greek government did bow down, all that would happen is that the economy would shrink further, Syriza might fall and divisions in Greece would increase – who knows, the fascists of Golden Dawn might start a civil war.
Faced with the half-baked economic policy of its creditors the most logical course of action for Greece is to leave the Eurozone. It would certainly help the Greeks to take control of their own destiny and show that there is an alternative.
Unfortunately, European policymakers remain wedded to the failed and naïve economic policy of austerity. It’s a policy that has already cost Europe’s citizens dear in terms of lost economic growth as we’ve entered a deflationary spiral that is keeping growth low and unemployment high. (Anyone doubting that austerity is naïve should watch this video interview with Professor Steve Keen).
Those who believe Greece is too small to matter are also missing the issue of contagion, as Nouriel Roubini has pointed out. His call for compromise has clearly been heeded by the Greeks who have made concessions but the EU, ECB and IMF are not doing likewise.
Unlike many of those baying for the Greek’s to take their medicine Yanis Varoufakis, the Greek finance minister who is intellectually honest and economically literate, also knows more austerity is poison for Greece. Thus he wrote recently that ‘Austerity is the only deal breaker’.
If the Greek situation does not come to a fair resolution it will continue to impede the growth of not just Greece but the whole of the EU. Taxpayers, who bailed out the banks, will continue to pay for mistakes made by the political financial-elite who got us into this mess.
Moreover, should Greece be forced out, volatility in the financial markets will increase greatly. In such a scenario you can likely expect Germany’s recent bond tantrum to be outdone by a bond market meltdown that spills into equity markets.
At this juncture investors would be well advised to keep cash aside to provide for some optionality in case of market falls. It might also make sense to heed the advice of investors including Jim Rogers, Mitch Feierstein and Marc Faber, and have some money parked in physical gold.
This is certainly not the time to be taking risky bets on any asset class. Maintaining your margin of safety and hedging your bets ought to be the watchword of every investor.