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In contrast to the "Lehman
2.0" viewpoint, some argue a Greek default could actually be bullish for
Europe and the euro.
What happens when Greece finally
defaults?
It's a question the whole world is
wondering -- or the whole investment world anyway.
Opinions on Greek default have settled into two
camps. One side sees a catastrophic event to be avoided at all costs. The
other, a healthy act of cleansing that can't come soon enough.
Angela Merkel, the Chancellor of
Germany, expressed her darkest fears over the weekend, arguing that a Greek
default would "destroy investor confidence" and could "spark
contagion" in the style of Lehman Brothers in 2008.
"We need to take steps we can
control," Merkel told her interviewer. "What we can't do is destroy
the confidence of all investors mid-course and get a situation where they say
that if we've done it for Greece, we will also do it
for Spain, for Belgium, or any other country. Then not a single person would
put their money in Europe anymore."
On the opposing side, Jim Rogers
believes Greece cannot default fast enough -- and says he would buy euros if
it did. Via a Reuters interview he explains:
Well I hope that Greece defaults. It
would be good for Europe, it would be good for Greece, it
would be good for the world. It would be good for the euro if they finally
accepted reality and made Greece default, made the people who made the bad
loans take their losses, and they made that happen to a couple of other
countries.
Everything would go down a lot... but
that would be such a magnificent buying signal I would buy all the euros I
could at that point, because then we would know we're going to have a sound
currency, we're going to have a strong euro.
It's not going to happen, but if it
happened that way, wow. Then we'd have a serious competitor to the U.S.
dollar.
Rogers admits that, in the event of
default, "everything would go down a lot" prior to triggering his
buy signal.
The question then becomes,
how much is "a lot?" For instance, if Rogers started liking the
euro at $1.25, would he love it at $1.10? How about 95 cents?
Financial Times
commentator Martin Wolf had a great line last week: "The eurozone then cannot stay where it is, cannot undo what
it has done and finds it traumatic to go forward." That about sums
it up.
In a bit of irony, Greece played a
role in the first known debt crisis more than two thousand years
ago. "History's first sovereign default came in the 4th century
BC," Bloomberg reports, "committed by 10 Greek municipalities.
There was one creditor: the temple of Delos..."
(This isn't the first time I've spoken
about Greek default. Sign up for Taipan Daily
to receive more investment
commentary.)
Now, 24 centuries on, the same tiny
country is giving investors fits. Either conditions
are set to rapidly improve, or they will quickly and dangerously get worse.
Some investors are buying euros (and
euro-denominated assets) now -- with blood in the streets -- in the hope that
everything will ramp when a sense of resolution comes.
London hedge fund manager Crispin Odey, for example, thinks European equities are
"mouth-wateringly attractive," with yields in the 5-6% range.
"It may be confusing to find
someone who believes that a crisis is on its way but is also happy to buy
equities ahead of the crisis," Odin says to clients. "For me the
crisis will bring resolution and with it higher prices."
A Greek exit could be a celebratory
event (as far as Mr. Market is concerned), or the
trigger mechanism for a new explosion.
This is what makes the current
environment so challenging. Serious top-down problems threaten to drive all
markets lower (perhaps much lower). Yet at the same time, value investors get
bolder with each new leg of decline.
Caution,
discipline and controlled risk management are the order of the day. Just
about the only guarantee is, when "DEFAULT" hits the financial
media headlines, a massive surge in volatility will too.
Justice
Litle
Taipan
Publishing Group
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