Greece’s Debt Crisis: Let Him Eat! Let Him Eat! by IceCap Asset Management
“Let him eat! Let him eat!” the crowd chanted as disgruntled former hot dog eating champion, Takeru Kobayashi watched intently from the audience as his nemesis Joey Chestnut prepared to gorge himself with 60+ hotdogs at the 2010 Nathan’s Hot Dog Eating Contest.
The 6-time champion had lost his title (and honour) 4 years earlier to the young American up and comer. Yet, this year the good folks at Nathan’s refused his entry into the competition due to the former champion’s wish to compete in a rival hot dog eating league.
On this brutally hot summer day, the scene was intense; something was about to happen and it did. I don’t know if it was the crowd egging him on, or the hot dogs themselves taunting him, but Mr. Kobayashi suddenly leapt onto the stage and mayhem ensued. Mr. Kobayashi was arrested for trespassing and 10 minutes and 54 hot dogs later Joey Chestnut was once again champion.
Five very hot summers later, the crowds have long forgotten about Takeru Kobayashi – after all, lazy summers and lazy heat can have that effect on people.
While the 2015 summer is drawing to a close, the heat in global financial markets has only begun to turn higher.
And in a cruel twist of fate, it will be autumn when the heat really turns up on financial markets.
Greece
Well, if you’re not Greeked-out by now you should be. After all, the Greek debt crisis has been spinning in and out of control for 5 years and counting.
Why should it be any different this time?
Everyone knows there is no way on this earth that Greece will ever be able to repay these debts. Unless the Greek economy can grow faster and longer than it has ever grown before, AND it can avoid the political temptation to never again spend more money than it collects in taxes – then just maybe it stands a chance of paying off some of the over $400 Billion it owes.
In today’s age of money printing, negative interest rates, and bank bailouts, many have become somewhat desensitized to “billions” and “trillions”. Yet, we assure you $400 billion for Greece is a lot of money.
For perspective, Australia owes about $1.3 trillion in various loans. If Australia suddenly entered a debt crisis on the same scale as Greece, its debt owing would skyrocket to nearly $2.5 trillion, or put another way – about $106,000 for every man, woman and child.
It just can’t work…
For Greece, it’s mathematically impossible to repay its debt. If anyone else tells you otherwise, it means they have no understanding whatsoever of how real economies actually work.
The sharpest and brightest minds at the IMF, the EU and the ECB (collectively referred to as the TROIKA) all agree that the solution to the Greek crisis is for Greece to pay more in taxes, for the Greek government to spend less money, and to continue to pay off its debt.
Let’s think about this for a very quick second:
- Greeks have to pay more taxes, which means less money is available for spending
- the Greek Government has to spend less money, which means less money is available for spending
- and of the money that the Greek government does spend, more of it has to be used to repay its debt, which means less of it is available for real spending;
And considering that economic growth is a function of aggregate spending, how on earth can any sane person expect the Greek economy to recover and grow?
The answer: they can’t. For further proof why it doesn’t work and it will never work, you just have to look at Iceland.
Iceland was the very first country wiped out by the 2008 global debt crisis. The Icelandic government and the Icelandic banks completely mismanaged everything for which they were financially responsible.
And when everything hit the fan – no one come running to save them, in fact, the complete opposite happened. Both Britain and the Netherlands threatened to completely wipe Iceland off the global financial map.
At the time, Icelandic banks offered regular banking accounts in Britain and the Netherlands that paid 6% interest. Considering other global banks offered 3% and less, and also considering that the vast majority of people in the world have no idea how a bank is structured; thousands of British and Dutch savers blindly ploughed their savings into these Icelandic bank accounts.
After all, it was a bank deposit, it was guaranteed by the bank and 6% is greater than 3%. Where was the risk with this?
Next, when the crisis hit Iceland – all bank accounts were frozen, and the savings of many British and Dutch investors melted away.
Suddenly, the risk with 6% was crystal clear.
Naturally, the British and Dutch governments both demanded their citizens be repaid for making stupid investment decisions.
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