ATHENS, Greece: On the drive in from the airport, my taxi driver and I got into a conversation about the country’s current troubles. By the time we reached my hotel in the central business district about 40 minutes later, I knew about his two children — one grown and out a job, the other in high school and without new clothes for two years now. I knew about his wife losing her job as an accountant. And his mother, who he fears will lose access to her medicines in a Grexit scenario because currency controls would devalue the new drachma so dramatically that all imports will become prohibitively expensive overnight.
As I exited, I asked, as I always do, for a receipt to document my cost on my company expense report. He frowned at me and shrugged his shoulders like, “Did you not hear my sad, sad tale? And you want a receipt?”
I found out three days later, when talking to an economist, that I had introduced a kink into a particular corner of the Greek black-market economy. Cabbies talk about their desperate family straits as a way to get their fares not to seek a receipt. No receipt, no need to report the transaction … and, thus, no reason to pay taxes. It’s a way to keep more of what you earn as a taxi driver.
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John Buckingham's presentation titled, 'Busting the Myths & Seven "Valuable" Themes for 2021'. The webinar for ValueWalk Premium members took place on 2/23/2021, and was followed by a Q&A. Stay tuned for our next webinar, Q4 2020 hedge fund letters, conferences and more John Buckingham Principal, Portfolio Manager, Kovitz Editor of The Prudent Speculator newsletter Read More
I would end up participating in that economy all over Athens during my five days in the country. It’s one of the reasons why I ventured to Greece in the first place. I wanted to interact in the economy on the verge of one of the greatest crises the country has ever faced.
It’s a crisis that will never amount to a Greek exit — a Grexit — as much of the Western press has been harping about since at least 2010. But it is creating an opportunity, which is why I already have Profit Seeker readers positioned for the coming rebound in one particular sector of the Greek economy.
As I wrote to you in my dispatch yesterday, Greece will not leave the euro zone of its own accord, nor will the Germans force the Greeks out. And the International Monetary Fund (IMF) certainly has no interest in pushing Greece too far. Here’s why:
Painted on a wall in Athens’ Plaka neighborhood.
The Greeks, most particularly Syriza, can’t allow a Grexit because that would instantly erase Syriza from the face of Greek politics for the rest of Greek history. It would forever be tagged as the party that killed the Greek economy and led the Greeks out of a currency union that has been indescribably beneficial to the people and their standard of living. The fallout would create economic, social and political unrest that destroys Greece for years to come and rips through the rest of Europe in very real and existential ways.
The Germans can’t allow the Greeks to depart because that would presage the death of the euro, despite all this horse hockey about a “managed exit.” It would call into question the viability of the euro and would keep others countries — namely Poland — from joining the club. Might even be enough to prompt a few to look to exit, too.
And the IMF can’t be seen allowing a country such as Greece — an EU member state — to fail. Bad for business that is, and would underscore just how poorly the IMF is at prescribing fixes to economic crises.
So, what we have unfolding is game theory. Who can extract the most without mortally wounding the other side — or themselves?
The Greek-German Conundrum
Syriza cannot win. Period.
Its hard-liners on the left either force a Grexit — which some of them naively want because they have the political experience of a houseplant — or the centrists nearer the middle force the party to back away from the “red lines” Syriza swore to defend when the party came to power in January. Either scenario deeply undermines the political movement among its supporters. When all is said and done, it’s likely Syriza has seen its 15 minutes of fame and will fade back into the shadows of Greek politics.
Germany will win — and that’s the ultimate game here.
The Germans do not want Greece out of the euro zone. Period. If Greece fails, a hammer blow to the euro’s head, the German economy suffers heavily. Worse, if Greece exits and succeeds with a new drachma, then other nations in the EU — Spain, Italy, Portugal, Ireland — will think, “Hey! If the Greeks can do it, we can do it, too!” And for Germany’s reliance on one continent/one currency, that’s actually worse than Greece failing!
Nor do the Germans want other anti-austerity political parties gaining strength elsewhere in Europe if Syriza is seen to have succeeded. That, too, leads us back to a bad scenario for the German economy since it calls into question the viability of the euro zone again.
Germany needs Syriza to be seen across the continent as a failure. It wants Greeks to fear that Syriza is leading them toward economic death … and it wants Syriza to break its red-line promises, angering local supporters, thereby sending a very clear message to other anti-austerity proponents in Europe that this is the fate they face, too.
As for Alexis Tsipras, the Greek prime minister and head of Syriza … well, he’s got his own game to win — and he likely will. He’s only 40 years old and clearly wants to be relevant in Greek politics for years to come. He cannot be the politician who led Greece into what would certainly be a cataclysmic Grexit. Neither can he be the politician who broke every vow he made to his voters.
The Only Solution
A grand bargain is where we are headed.
There’s a great likelihood Germany pushes Greece to the brink of default, maybe even to the point that currency controls are imposed on Greece (without Greece leaving the euro) similar to what Cypriots faced in Cyprus’ collapse a few years ago. That will cause mass upheaval and panic in the Greek economy and population, and it will permanently undermine Syriza.
After a very short bout of panic, however, the Germans, at the IMF’s request, will allow for debt relief that reduces the debt payment burdens on Greece going forward.
Germany will claim victory in killing anti-austerity sentiment in Europe.
The IMF will save face as the organization that “convinced” the Germans to show some mercy on the poor Greek populace.
And Alexis Tsipras will be able to claim that he stood toe to toe with the mighty Germans and extracted meaningful debt forgiveness. Syriza will dwindle back into the nonentity it once was, and Tsipras will live to fight another day as a moderate, left-leaning politician.
And when we’re back to a world where the media has forgotten the word “Grexit,” investors who were savvy enough to wade into the Greek crisis even as it was unfolding will find that the pennies they spent today will be multiple dollars tomorrow — meaning returns of multiple hundreds of percent as the country returns to a sense of normalcy. It’s why I have Profit Seeker readers prepared for the best…
Because the worst isn’t in the cards.
Until next time, stay Sovereign…
Jeff D. Opdyke
Editor, Profit Seeker