Is the IMF bailout just another Greek myth?
In one of the famous Labors of Hercules, he had to defeat the Hydra, a many-headed serpent. Every time he cut one off, two more would grow back in its place.
Debt guarantees are like fighting this beast with a sword. Every time a plan is cobbled together, two new problems emerge. The latest idea is to come at the problem with overwhelming cash–€30 billion in guarantees. But this just kicks the can down the road; it attacks the Hydra with a bigger sword.
There are really only three solutions. One is default. That would cripple the European banking system, and close Greece off from fresh capital for a decade. Another possibility is exiting the Euro and devaluing the currency. That’s effectively a default on external debt. But you can’t devalue your way to prosperity. Zimbabwe tried. The real solution is to adopt significant austerity measures. This takes serious leadership and social solidarity. It’s hard to see how Greece, with its legacy of default and social unrest, could do this.
In the end, Hercules used the Hydra’s own poisonous blood to stanch each wound, preventing the heads from coming back. A Greek default means the poison of bad credit will reign in spending and cut living standards. Not the way they’d like, though. Any way you cut it, Greece needs a hero.
Douglas R. Tengdin, CFA
Chief Investment Officer
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