Greece is entangled in an ungovernable mess.
To me, the reason is quite simple: Greece has too much debt and it cannot grow under the actual circumstances.
What’s worse, the problems in the euro zone are rising once again at a moment when the world economy is slowing.
No, investors shouldn’t think the European Monetary Union (EMU) crisis is limited to a sovereign debt crisis in some of its member states.
While it’s a fact that sovereign balance sheets cause “growing discomfort” across most of the developed world, we cannot overlook the fact it’s only in the euro zone that sovereign bond yields are at “vigilante-levels.”
As an investor, one could ask himself or herself what’s the reason for this situation. Well, it’s becoming clearer by the day that the reason is multifold: firstly the structure of euro zone; secondly its leadership and thirdly its governance that are causing the euro zone’s problems.
Countries like Greece and the other “peripheral” seriously troubled euro zone countries don’t have the ability to control their own monetary policies as it’s the European Central Bank (ECB) in Frankfurt that takes care of the “one-fit-all” monetary policy and that is imposed on all still “sovereign” euro zone member states and it is precisely that situation that right now appears to be the main problem. No need to say the euro zone’s monetary union troubled situation is in complete in contrast to the situation in the U.S., and practically in all other countries in the world, where monetary unions aren’t in use outside effective “political” unions.
For now, Greece stands before “unsustainable” and practically undoable paths. It will have to cut public expenditures, make structural reforms and create a really efficient taxation system, and that will take time, a very long time that could take many, many years, if — and yes that’s a very big if — that ever will occur.
George Soros is completely right when he says the euro zone has no plan B with no practical form of exit foreseen. Therefore, the euro zone authorities are sticking to the status quo and insisting on preserving the existing arrangements instead of recognizing there are fundamental flaws that need to be corrected.
The euro zone decisionmakers don’t seem to read or understand the writings on the walls everywhere telling the euro zone debt crisis in Greece, in the other Club Med countries plus Ireland will test the EU's cohesiveness at a time of popular disquiet is on the rise in the wealthier countries (core) over the ongoing bailouts with the money of their taxpayers and voters.
In my opinion, Greek default is unavoidable. It doesn’t matter if it is now or within a year or so.
In case I’m right (I hope I’m wrong) it will be a situation to fasten your seatbelts when the Greek Pandora’s Box will open and infect the whole world. No, that’s not the end of the world, but it won’t be pleasant. As always, we’ll have to wait and see what happens. In the meantime, being on the sidelines is a safe place to be. Investors should know where to hide. Cash could become king once again.
In this context, investors should also pay attention to the just released Bank for International Settlements (BIS), which is an intergovernmental organization of central banks that “fosters” international monetary and financial cooperation and serves as a bank for central banks its 81st Annual Report states that, although the global economy has been improving, it would be a mistake for policymakers to relax.
Numerous legacies and lessons of the financial crisis still require attention. Maybe more important it sends a warning to the emerging economies and as we all know the actual crisis had its roots in the U.S. and spread primarily to other advanced economies, having originated in the imprudent use and inadequate regulation of complex securitizations by large banks.
Today, similar imbalances are building up in emerging economies as many emerging market economies are experiencing rapid growth, booming housing markets and rising indebtedness in the private sector. For instance, Brazil, China and India all saw credit grow by an annual average of more than 20 percent between 2006 and 2010, equal to or greater than the rates of growth recorded in Ireland and Spain.
The emerging market economies escaped the worst of the last crisis. If they can heed what perhaps was its most important lesson — that prevention is better than cure — they may be able to avoid suffering their own version of it. As an investor, I wouldn’t overlook this warning, of course, if you have investments in emerging economies.
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