In 2011, John Mauldin, an influential Texas-based financial advisor, went to Europe to meet local market experts, hoping to get a handle on the Greek debt crisis. At a party hosted by a Swiss banker, he asked everyone to raise a hand if they thought the euro would be higher in value in one year's time. Six arms shot up. Mauldin then asked about a euro decline and 12 hands were raised. A total of 18 votes were cast from a group of 15 dinner guests, not including Mauldin, which meant that three professional market watchers could not make up their minds about what to expect and had voted both ways.
The only thing everyone agreed about on Mauldin's trip was that Greek support for austerity measures tied to so-called bailout funds didn't matter much beyond the short term because the nation would eventually default. Now that a default has occurred, there is still no consensus surrounding what it all means to the world economy.
According to this BBC report, Greek Prime Minister Alexis Tsipras has promised to suggest a "fair and viable solution" this week. The Greek definition of fair will determine the outcome because massive write-offs of debt will eventually be required and German voters do not see that as fair (despite the European reconstruction plan that cancelled 50 per cent of Germany's crippling debts in 1953).
Simply put, the Greeks could argue that what was good for Germany in 1953 is good for Greece today. Or Tsipras could blink and put forward a solution similar to what has been previously tabled by Greece's creditors.
As pointed out in "Budget Crisis: Who Should Bear the Burden of Reducing the Deficit and Debt?" -- an Ivey case study on Uncle Sam's flirtation with defaulting on his financial obligations in 2011 -- there is never a clear answer when people start asking who should be responsible for a nation's debt when it becomes unmanageable. And the question is far more complex when it involves a member of the eurozone.
Keep in mind that Greece does not have its own currency to devalue to gain economic relief. And so the nation's debt problem can't be fixed by issuing more loans with conditions that kill economic growth. If truth be told, there has never been a bailout designed to bail out the Greeks. The aid issued to date has been all about buying time to play musical bondholders.
As everybody in the sovereign debt game knows, few countries ever pay back principal in the international financial system as it runs today. And when Greece entered the eurozone with cooked books, European banks happily lent the nation billions of dollars that will never be repaid, much of which returned to Germany in the form of export sales. As a result, a Greek default once threatened to be a material event for the global economy.
The direct exposure of Canadian banks to Greek debt has always been relatively low. But when Mark Carney ran the Bank of Canada, one of the reasons he held back on interest rates was the exposure of North American banks to EU banks holding Greek bonds via financial derivatives that function like insurance. Since then, however, billions of dollars in exposure to Greek debt have been transferred from EU banks to European taxpayers. And that means the global financial system gained at least some insulation from this crisis.
If the Greeks set a precedent that other troubled EU countries try to follow, then the euro could fail and send the global economy into turmoil. Nevertheless, the big concern for Canada now is that continued economic weakness in the eurozone will depress commodity prices, adding downward pressure on oil, notes Ivey Business School economist Mike Moffatt, adding, "Continued weakness in the oil patch may cause the Bank of Canada to once again cut interest rates."
If Greece plays its hand right, which will be difficult considering the pain involved in playing chicken with its creditors, it might be allowed to default on a significant amount of debt and remain in the eurozone. After all, as noted in a recent commentary by Barry Bannister, chief macro and portfolio strategist at Stifel Nicolaus, Greece is not Argentina, so it should have no problem obtaining loans from different creditors (think Russia or China) if it leaves the eurozone. Meanwhile, the "ECB cannot afford the hit to its credibility and the great unwind of its raison d'être, which is the euro, by allowing the precedent of an exit door."
Investors, of course, should recall the misplaced confidence of former U.S. Federal Reserve Chairman Ben Bernanke in March 2007, when he insisted the subprime mortgage crisis didn't appear to be spreading, so "the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained."
That said, Greg Newman, a director of wealth management with ScotiaMcLeod, sees the potential of a decent market buying opportunity emerging for Canadians who are patient enough to wait for markets to digest the Greek default. "I think investors might want to be prepared for a period of uncertainty," he says. "While investors believe the ECB has the tools it needs to ring fence contagion, which is very important for the bull market to endure, it does not mean that the market will be stable. Keep in mind that in the past, market volatility related to Greece was followed by the can getting kicked down the road. And that very well may not happen this time. As such, I think investors should be patient and wait for a bigger pull back."
Canadians should also note that spending money you don't have always eventually comes back to haunt you.
ABOUT THE AUTHOR: Thomas Watson is editor of the Ivey Business Journal published by the Ivey Business School at Western University in London, Ont.
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