The Truth About Greece’s Ultimate Fate

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The Truth About Greece’s Fate
0Feb 19th, 2012 | By Shah Gilani

Last year was one of the wackiest and definitely one of the most volatile years in the history of stock markets.

For a good part of the year, all eyes were on Greece, that slippery sibling of the 17 Sisters currency family. The country

1. was going to default;
2. wasn’t going to default;
3. was going to be let go by the Union;
4. was going to go on its own;
5. was hauled back into the E.U. boat;
6. begged and clawed to get back into German good graces, even as its citizens gave the Teutonic Tamers the collective finger along with other E.U. (as in "everything yours is ours") creditors who wanted Greeks to slide their airport and maybe some stone-walled vestiges of the world’s first democracy into a collateral pool to back promises of repayment.

The fate of the free world, and China too, was held hostage to contagion fears – that a Greek tragedy would infect global banks, and that the Great Recession would start to look like a fond memory.

But then, something miraculous happened. Christmas came early for miserly bankers.

Only a few days before Santa started packing his own sled, the ECB one-upped him. In one day, the ECB dumped $639 billion USD down the chimneys of 523 shivering European banks.

As the Brits say, "Brilliant!" That deft move was more than kindling for global markets.

But, while contagion fears have been greatly tempered, Greece still hangs in the balance.

Like the ill-fated Costa Concordia – that oversized cruise ship that ran aground last month off the coast of Italy – Greece looks to be listing… and hope and prospects for economic growth may be without a lifeboat, but she hasn’t sunk over the ledge that she rests on.

So is she eventually going to slip over the edge and out of sight? Yes.

Here’s what’s really happening…
It’s Just Another Game of "Extend and Pretend"

You know those severe fiscal austerity measures being forced on Greece to get the bailout it needs to stay afloat?

Well, it’s a lot like the need to pump the 2,380 tonnes of fuel out of the distressed Costa Concordia.

Once all future economic fuel is removed from Greece, like it will be removed from the listing Concordia, then they will both be light enough to be shifted just enough to tip over the precarious ledge they both rest on.

The ECB knows full well that Greece will default. It has to. And it will.

So why all the fuss?

This is just another game of "extend and pretend," in case you’re not a gamer and didn’t see this for what it really is.

The ECB, with initial (and massive) help from the Fed (who offered up early "stocking stuffers" in the form of unlimited dollar swaps to all central bank comers) has been buying as much time as it can, all the while pretending that Greece was going to be supported by its E.U. currency cronies, and not default, and not trigger the dreaded contagion.

And it’s working – the "extend" part, that is. Markets have reacted beautifully to additional liquidity measures (meaning massive direct injections of pure cash into European banks).

Contagion fears have abated.

To top off the "extend" tank, even China has chimed in (off-the-record, of course) by indicating, in not so many words, that if Greece takes the necessary austerity measures the Chinese want to see (so the Chinese aren’t throwing money into a profligate sinkhole), it will pony up a chunk of change for the EFSF. That’s been more fuel for markets.

The extend game is also all about giving economies time to revive themselves.

The U.S. is case number one. So far, so good. There are signs of green shoots here, and American banks have been given time to build reserves, courtesy of the Fed’s endless zero interest rate policies.

All we need is time.

Then, at some point, the "pretend" part will end… and Greece will default.
There is No Other Option for Greece

It can’t grow, under these Herculean austerity measures being imposed on it. There is no sun for it to grow under the umbrella of a strong euro, which will strengthen once Europe starts growing again.

So Greece will follow Iceland.

It will say: "To hell with all of you, we’ll take our own medicine and lift ourselves up by our own bootstraps."

It will issue its own currency. Everything will be cheap in Greece. And tourism, its economic mainstay, will explode.

Personally, I’ve always wanted to go to Greece and cruise the islands. When Greece is suddenly half-price, I’m going to rent a sailboat, a big one, and live there cheaply for a whole summer. No doubt I’ll see you there, too.

The ECB, in its infinite wisdom, has already covered its own you-know-what in anticipation of Greece’s default.

It came out last week and swapped its 50 billion euros of Greek debt for new debt from Greece, with the same face amount. Why? Because the new debt won’t be subject to "collective-clause" agreements about to be imposed on "private" creditors. (Wait until you see this mess!)

Right now everything is looking amazingly positive. Markets, in particular, are exceptionally strong. I expect to see them remain so.

That is… until Greece does a Concordia rollover. Then, as the tide goes out, we’ll really see, as Warren Buffett famously said, "Who has been swimming without a bathing suit."

We better hope the "extend" game has been put to good use by banks. Otherwise that little contagion thing that everyone feared last year, well… it will make us wish it was last year.

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