Tags: Greece | euro | OECD | US

The Damage to the Eurozone and Greece Has Already Been Done

Wednesday, 03 June 2015 11:10 AM Current | Bio | Archive

Because of what's going on (or not going on) with Greece, the European Commission, the European Central Bank (ECB) and to a somewhat lesser extent the International Monetary Fund (IMF), the whole state of play makes my think over and over again at Harold Bell Wright's words: "Eyes blinded by the fog of things cannot see truth. Ears deafened by the din of things cannot hear truth. Brains bewildered by the whirl of things cannot think truth." Because there doesn't seem to be any decent solution in sight, at least to me, it could be a huge miscalculation to "calculate in" any form of a real and honest good outcome for Greece and the EU in the short to medium term.

Therefore, getting optimistic about the whole Greece related "mud" getting a positive and durable solution any time soon could probably turn out as a very costly error.

Maybe Goldman Sachs nailed it: "The Greeks cannot have their cake and eat it. A hard choice has to be made between euro exit and adjustment to remain in European Monetary Union (EMU)."

Of course, as the IMF explained in a new research paper, a solution can always be found, at least when a country's fiscal space determined by the distance to its debt limit permits it, which is absolutely not the case for Greece, but also not for Italy, Japan and Cyprus/

Let's not fool ourselves, Greece has a debt-to-GDP ratio of 177 percent and faces negative/contracting growth. It's simply impossible it could pay its debt without new haircuts, raising its income flows and curtailing its expenses, which brings us to its Syriza dictated "red lines."

One of the main problems, but surely not the only one, for Greece still remains it is literally "boxed-in" in the unique euro trade-weighted exchange rate, which cannot be forced down for Greece's sake alone, and therefore it faces continuous "internal" devaluation. Of course, a Grexit would resolve that problem, but then the euro would lose its "irrevocability" status.

Whatever the outcome, the damage to the eurozone and Greece has already been done.

That said, investors who look at the U.S. got confused Tuesday by the Census Bureau's reporting factory orders that fell 0.4 percent in April, which was the eighth decline in nine months. However, the factory orders were a tick better than the first estimate of -0.5 percent we got on May 26.

It is interesting to see the May Manufacturing ISM Report on Business shows an improving economy, increasing demand and improving flow of goods with the overall economy and the manufacturing sector growing at a faster pace was instantly forgotten.

In addition, the May Purchasing Managers' Index was 52.8, which corresponds with 3 percent annual real GDP growth. This confirmed growth for the 72nd consecutive month in the overall economy. Expansion in the production sector came in at 54.5, which also confirmed expansion for the 29th consecutive month. Please keep in mind an index above 51.1 percent, over time, is generally consistent with an increase in the Federal Reserve Board's Industrial Production figures, which is obviously the case here.

All that said, the OECD's "General Assessment of the Macroeconomic Situation" cuts overall 2015 growth expectations from 3.7 percent to 3.1 percent despite monetary stimulus and lower oil prices as investment lags, while also lowering growth expectations for the U.S. to 2.0 percent in 2015 (down from 3.1 percent in November) and 2.8 percent (down from 3.0 percent) in 2016. I remain positive on U.S. growth because when we look at the OECD's quarter-on-quarter growth estimates, the U.S. remains comfortably above the 2.0 percent while real investment growth continues on the upside at around 7 percent.

The OECD noted: "Extraordinary risks include geopolitical upheavals and severe financial instability brought about by a disorderly exit from the zero interest rate policy in the United States, failure to reach a satisfactory agreement between Greece and its creditors and a hard landing in China."

The OECD also expects the upper bound of the target federal funds rate to be raised gradually between September 2015 and December 2016 from the current level of 0.25 percent to 2 percent, which is a positive for the dollar, while for the euro area, it assumes the ECB refinancing rate to be kept at 0.05 percent throughout the projection period until September 2016, which is a negative for the euro.

No, as an investor it's not always easy to look through the "fog of things" to see the truth.

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Because there doesn't seem to be any decent solution in sight, at least to me, it could be a huge miscalculation to "calculate in" any form of a real and honest good outcome for Greece and the EU in the short to medium term.
Greece, euro, OECD, US
Wednesday, 03 June 2015 11:10 AM
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