OXI To Austerity! Implications Of The Greece’s Debt Crisis – CCM

OXI To Austerity! Implications Of The Greece’s Debt Crisis – CCM
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OXI To Austerity! Implications Of The Greece’s Debt Crisis by Causeway Capital Management

“I would like to see Greece as a case study, an opportunity for Europe to strengthen its coordination of fiscal policy.”

-George Papandreou, former prime minister of Greece, 2009-2011

Unfortunately, the former Greek leader can now watch his country move from case study…to basket case.  Even the Save Greece crowdfunding campaign (which raised €1.8 million toward the €1.6 billion goal) came up short.  This year, with stronger bank balance sheets and central bank support, the contagion risk of depositor panic withdrawals seems unlikely in the rest of Europe.  However, layers of bank regulations do not solve the underlying conundrum facing the euro zone (EZ).   How do these 19 countries reconcile national sovereignty with the need to mutualize liabilities?  The EZ economic unification process ramped up this past January 2015 with the official abandonment of the EZ’s austerity-based monetary regime.  In exchange, the European Central Bank (ECB) adopted extreme monetary liquidity as the region’s economic salvation, led by the quantitative easing (QE) program of sovereign bond purchases on secondary markets.  As evidenced by the recent Greek referendum “No” victory, long suffering voters may eventually reject austerity.  QE cannot revive Europe without concurrent domestic reforms and fiscal stimuli.  ECB president Mario Draghi argued at the annual central bank symposium last August in Jackson Hole that the EZ can only achieve sustainable economic recovery via coordinated fiscal and monetary policy, and the fiscal policy can only be coordinated across the region via Brussels.  Headwinds to coordinated fiscal policy include a rise in leftwing populist political parties (such as Podemos in Spain, Five Star Movement in Italy, and Syriza in Greece).  Populist governments (or, some would call them, demagogues) will likely gain power as long as European youth unemployment remains unresolved (an estimated 50% of Greek youth remain jobless), the flood of migrants (primarily from the Middle East and Africa) continues unabated, and Germany appears most influential in EZ policy. We believe that an end to the funding lifeline for Greece may ultimately become an important catalyst for greater European fiscal unity.  However, a collapsed Greek banking system would fund itself via a new currency, with attendant spiraling inflation.  Any government paying its bills (and pensioners) in worthless IOUs probably has a very short life—and such a collapse and crisis would reveal the populist deception to voters—especially those in Portugal, Spain and Italy. Austerity hurts, but capital controls and hyperinflation are far worse.

Bonhoeffer Fund July 2022 Performance Update