The cradle of Western civilization might fall into chaos in January 2015. Greece will attempt to show the world how democracy works — or, more accurately, if it still can work.
We’re all glad the ancient Greeks invented democracy of course, but it doesn’t always work perfectly. The “democratic“ process can leave a nation in ruins.
Markets are still in a low-volume holiday mode, but today’s events in Greece sent European stocks down. What happened?
Greece spent the last few years chafing under harsh austerity measures due to its heavy debt load. Creditor nations, especially Germany, demanded Greece cut public spending so it could pay down its debt faster.
The resulting public unhappiness points out one of democracy’s structural flaws. Individual Greeks, who may have voted for the opposition and had nothing to do with running up the national debt, nevertheless have to suffer the consequences. Plato himself probably wouldn’t like this situation.
Not surprisingly, several anti-austerity parties have gained popularity while the country’s traditional leadership class lost ground.
Today, the country’s parliament tried for a third time to elect a president — which is a largely ceremonial office in Greece — but no candidates reached the required supermajority.
Under Greece’s constitution, this means the current parliament dissolves and voters elect a new parliament in a “snap“ election on Jan. 25. Recent opinion polls suggest the left wing, anti-austerity Syriza party could beat the currently-governing New Democracy party.
The idea of Syriza taking power in Greece strikes fear in the heart of German bankers. The party wants to restore public spending and end most of the austerity measures imposed in the last few years.
More to the point, Syriza leaders think the country’s bondholders should take a Caesar-like “haircut“ and receive only partial principal repayment. The banks and other bondholders don’t like that idea at all.
Nevertheless, if Syriza beats New Democracy in next month’s election and manages to form a governing coalition with smaller parties, Greece could well default on some of its public debt.
Worse — at least from the German perspective — is that a default would likely result in Greece exiting the Eurozone currency union. Traders call this the “Grexit“ scenario. Get ready to see that term in the news more often.
Other debtor nations will almost certainly follow if Greece abandons the euro. Public pressure could force Portugal, Italy, Ireland and Spain to drop the euro, too.
At that point, Germany and France would have little reason to keep the euro alive, so the whole currency union would probably fall apart. This would be a major, world-changing event — and the balls could start rolling just four weeks from now.
It is no exaggeration to say that the fate of the global economy is in the hands of Greek voters. Let’s hope they make the right choice.
What would be the right choice? I’m not Greek, so in one sense it is none of my business. I expect people there will vote according to their own best interest, just as we do here in the United States.
Generally, I think people (and nations) who borrow money ought to repay it as originally agreed. Then, they can go on to spend their money in other ways.
On the other hand, I think we also have to recognize that unforeseen circumstances can keep debtors from paying as agreed. That’s why we have bankruptcy courts. They sort out the mess and find a fair compromise.
A hardline bondholder could rightly say to Greece, “It’s not our fault you spent the money on boondoggle public works projects. Pay us back in full.“
Likewise, Syriza might say to bondholders, “You knew how we were spending the money and you loaned it to us anyway. Now you should share the pain.“
Both sides have a point. I’m glad I am not in charge of the cleanup. It’s going to be ugly work.
The Greek news put a damper on European trading today, but U.S. stocks seemed directionless anyway. Here is a quick headline review.
- Despite the holidays, we’ll get some key economic data this week. U.S. releases will include consumer confidence, pending home sales, and the ISM manufacturing index.
- Retailers are cleaning up from the Christmas rush and adding up the numbers. Our spot check of one superstore found the post-Christmas clearance section almost empty by Sunday afternoon.
- Militants attacked oil facilities in Libya overnight, leaving a large storage facility in flames and cutting the country’s export volume.
- The attack didn’t seem to help oil prices, though. Both the U.S. WTI contract and Europe’s Brent Crude benchmark fell more than 2% today.
- Weakness in Dow components Microsoft (MSFT) and International Business Machines (IBM) held the DJIA back today. MSFT also weighed in the Nasdaq Composite, but gains in Gilead Sciences (GILD) helped boost that index ahead of the Dow.
- Cult burger chain Shake Shack filed its initial public offering forms with the SEC today. Analysts think public investors will value the firm at $1 billion or even more.
- Ebola reached Scotland. A Glasgow health care worker who had just returned from caring for Ebola patients in West Africa tested positive for the disease and is now in isolation.
- Another suspected Ebola case in Japan was a false alarm. Health authorities around the globe are still on the lookout as the disease still rages in Africa.
Good Luck and Happy Investing,
Uncommon Wisdom Daily
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