»The Daily Reckoning by Bill Borner

All Greece can do is default
28 JUNE 2011

London, England

Most of investors' attention has been fixed on the Eurozone. Europeans wring their hands or curl their lips. They are worried. They are mad. And they don't know what to make of the situation.

French bankers came up with a plan - much like the Brady bonds of Latin American debt fame. The idea is simply to roll over Greek debt, voluntarily, to 30 years. This is a default...but it's a graceful default. Lenders lose money - they don't get their money as promised. But they can still hold their heads up; they'll get it later. If everything goes well.

Investors seemed to be betting on it yesterday. Stocks and bonds rose.

Trouble is, things are not likely to go well. There is no plausible growth rate that will make it possible for the Greeks to 'grow their way out' of this debt. All they can do is default, on way or another.

Americans who take the trouble to look across the Atlantic gloat. They knew the euro would never work out. And now, even Europeans themselves are saying so.

Our old friend John Mauldin, for example, recorded French economist Charles Gave as follows:

Now, for those who have never had the extreme pleasure of time with Charles, he is a powerful, white-haired French patrician, and one of the better economists I know. Quite a brilliant thinker and not afraid to express his mind forcefully with a voice that sounds like God talking, with about the same assurance (note to self: never again follow Charles on a speaking stage).

"The question is entirely irrelevant" - punctuating the air for added emphasis. "The euro will not exist in a year. The whole thing was dysfunctional from the beginning."
Gave has a habit of coming up with clever, well-argued ideas that turn out to be absurd. The fact that he thinks the euro is doomed makes us want to shift some money into the European currency. Besides, the dysfunctional nature of European central planning is a blessing; the Europeans aren't nearly as good at undermining their currency as Americans.

Along the southern and western periphery of Europe, people are wondering what will happen next. This week, the Greeks are scheduled to vote on a 5-year austerity plan. If they vote against it, maybe the French will reconsider. But the French banks aren't the only ones holding Greek debt. It's all over the financial world. Sooner or later, it will have to be reckoned with.

Further to the west, Italians are getting ready to vote too. They run deficits and are faced with the threat of bankruptcy too. In minutes, fearful investors could push up the price of borrowing beyond their reach. They need to soothe the marketplace by beginning to cut spending now. On Thursday, Berlusconi's cabinet is expected to approve $40 billion of cuts.

Meanwhile, the lire has dropped to its lowest level ever against the Swiss franc and Italian 10-year notes yield more than 220 basis points above German bunds.

Keep following the sun, and the story gets worse. In Spain, Portugal, and Ireland "austerity," cutbacks and threats of bankruptcy are in today's headlines.

But wait. We didn't have to come to Europe to read headlines like that. The LA Dodgers filed for bankruptcy yesterday.

And what about the Golden State? Or Illinois? Or New York? If these were separate countries their finances would be no better than that of Europe's southern tier. Add their share of the US central government debt, and their share of unfunded pension and health programs, to their already bulging state and local debt and what do you have? That's right, Greece!

In terms of debt to GDP, many of America's states are as heavily burdened as Europe's limping, battered debt-plagued countries. The difference is, in America the central government shoulders the largest portion of the debt.

So, in Europe, a few marginal nations head for bankruptcy. In America, the whole shebang is going broke.

*** Connecticut's governor says he'll cut 7,500 employees. New York's unionized public workers agreed to a salary freeze and other giveback measures in order to avoid a layoff.

Here's an article in the Atlantic, explaining why cutbacks at the state and local level are bad news:
In March 2010, the U.S. economy finally began to add jobs again. Every month since then, private sector employment has grown. Yet almost every month since then, state and local governments have cut jobs. Without those layoffs, the U.S. labor market would have 326,000 more people employed through May 2011. Here's a chart showing job growth with and without the impact of state and local government cuts:

You can see that the jobs picture looks better if you exclude the effect of state and local government layoffs. The only real outlier was October 2010, when state and local governments added 31,000 jobs. If no government jobs had been shed since March 2010, the unemployment rate in May would have been 8.8% instead of 9.1%. That might not seem like a huge change, but surely there would be some positive benefit to consumer sentiment if the headline rate was below 9% at this time, instead of having ticked back above it over the past few months. Moreover, those 326,000 more people who would still have jobs would have spent more money to stimulate the economy.

The negative impact of state and local government austerity isn't limited to employment: it has also affected GDP over the past year, and especially over the past two quarters. Since the fourth quarter of 2009, state and local spending has dropped by $8.8 billion.
The article goes on to say that cuts at the state and local level have reduced GDP growth by 0 .8% since 2009. The editor does not seem aware that this is zombie growth, not the real thing. We're better off without it.

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*** "I got the tractor out of the field. What happened to it? A couple of the hoses were burnt, the radiator was melted and there was nothing left of the right from tire."

While your editor is in Europe, his cousin came to his rescue.

"It caught on fire," we shouted into the phone.

It is not very often that the Bonner family sees your editor running across a field with his pants smoking. But that was the scene last weekend. Without stopping to explain, he yelled to the French kid who was visiting.

"Allez...reveillez Edward...vite...." He was meant to run upstairs and get Edward, 17.

Then, we dashed over to a trash can and began filling it with water. The can filled slowly as the family began to notice a big cloud of dark smoke out in the field in front of the house.

"Que pasa," asked Mila, the El Salvadorean woman who had come to help weed the garden.

In a few moments, we had a multi-lingual emergency on our hands. We loaded the plastic garbage can onto the back of the pick-up and dashed out into the field. We took a bucket full of water and, getting as close to the tractor as we dared, sloshed water over the gas tank.

By then, flames were shooting 20 feet in the air. The fuel line must have given way. We repeated the maneuver a couple of times...the cold liquid hit the tractor like water on a hot skillet, beading up and popping around. Then, we saw Mila calmly unrolling a hose. She figured, correctly, that the hose would be just long enough to reach the tractor.

We aimed a jet of water towards the burning engine, making sure to keep the gas tank cooled. After a couple of minutes, it seemed to settle things down. When we left that evening, for our European trip, it was still smoking...but the fire was out.

"Did you call the fire department," our cousin asked.

"No...I was too embarrassed. And there wasn't time."

"What were you embarrassed about; these old tractors catch on fire from time to time."

"Yes, but it didn't actually happen that way. It was raining. So, I decided to burn a big pile of limbs and branches that I had picked up in the field. Then, I used the front end loader on the tractor to push the fire together.

"Well, I was on a hill...and the ground was getting wet. So when I pushed into the fire, I slid and went right into the middle of the fire. Then, when I tried to back out, the tractor wouldn't move. And I was afraid to stay on the tractor to try to work it out...because I was afraid the gas tank was going to explode."

"Well, you didn't have to worry about that."

"Why not?"

"It's diesel."


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