Rip off the Greek band aid

Illustration: Sam BennettLast week, the three parties that constitute Greece’s governing coalition released a policy statement indicating the country would push out by another two years the fiscal deadlines under the country’s bailout program.
Nanjing Night Net

You can understand the Greek’s point. Why bother sticking to the terms of the bailout agreement signed just weeks ago when jamming your fingers in your ears, closing your eyes and telling the rest of Europe to stick it is a more attractive path?

Greece is already suffering. The official unemployment rate is 21.9%, and last year 110,000 companies folded. Over the past five years, the economy has shrunk by 17%. This year, economic output is expected to fall by another 3.5-4.0%.

Bailouts so far already account for more than 150% of GDP. Why accept more austerity and more debt when there’s no sign of it doing any good?

When Argentina defaulted, its economy contracted by about 20%. If you’re getting default-like economic contractions, social unrest and massive unemployment even when you’re trying to pay your debtors, why not just default and be done with it? How much worse can things be?

The Greeks know the rest of Europe can see that possibility. Which is why they highly rate the chances of Europe’s capitulation to this renegotiation.

The consequences of a possible Greek default are already being paid by Greece. A far higher price will be paid by EU members, especially Spain and Italy, if the Greeks don’t co-operate.

And so it goes on. Another week, another summit—there have been 19 now in two years—and another bailout agreement. And still there is no sense of an ending.

Financial commentators are divided. Some call for more bailouts, some fiscal unity and others for Greece to be booted out now. Paul Keating wants to give them some cash, wish them well and show them the door.

Deep problems are best confronted, not avoided. Deal with the source of a problem directly and you have a chance of solving it. Pretending it isn’t there only makes matters worse.

Right now, the EU is making things worse.

Europe can spend the rest of the decade working on bailout after bailout while the life slowly drains from Greece and its people. Better to rip off the band-aid and see how it pans out.

This doesn’t need to be a brutal expulsion. Perhaps Greece could be offered a way to stay in the EU under some sort of “transitional regime”, with some cash slung their way à la Keating.

The money that would have been spent on a never-ending cycle of bailouts could then be used to ensure Greek security and shore up Spain and Italy.

As for Greece, and those with financial exposure to the country, they may just surprise us with their capacity to adapt.

Knowing that the tap has been turned off will be painful, but possibly not that much more painful than what the country is already suffering.

Facing the worst possible scenario may even have a transformative effect. Action tends to be far bolder when there is no other choice.

At the very least, the huge shroud of uncertainty that hangs over the world and its economy would lift a little. We would know whether things were going to work out or if a complete financial meltdown was on our hands.

Right now, everyone’s just waiting for the worst possible outcome.

Better to bring it on than pretend that each EU meeting, new bailout and new election is going to fix a problem that everyone knows hasn’t gone away.

This article contains general investment advice only (under AFSL 282288).

Richard Livingston is Managing Director of Walnut Report, Intelligent Investor’s new publication about tax and SMSF investing. BusinessDay readers can enjoy a free trial offer. For more Intelligent Investor articles click here.

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