Something amazing happened last week. Something that isn’t getting enough attention. Something that for once is a change for good. I’m talking about Greece and it’s new government Tsyriza. Greece’s newly elected Prime Minister has called for a write down of the debt and he’s now gained support from France, Spain and ironically enough President Obama. I don’t think President Obama realizes the consequences a Greek write down will have for the world. But that’s OK, it’s not like his opinion matters…
Anyways for the first time in a long time, we have a government is opposed to the “extend and pretend” status quo. Extend debt out to longer term and pretend it doesn’t matter any more. This is the very Bullshit our world runs on. But now that’s coming to an end. Greece is forcing the whole world reexamine its debts. It’s obvious that Greece can’t pay off its debts which stand at 175% of gdp. It’s also obvious that a lot of other developed countries can’t pay their debts. But no one has yet admitted it… Until now. Or at least Alexis Tsipras did last week in an open letter to the citizens of Germany. This amazing moment cannot be overlooked as the tiny country of Greece whose citizens have been pushed to the breaking point finally shout out “WE’VE HAD ENOUGH!”
Welcome to the end game, where the coyotes start to tilt their heads below the horizon and the solid ground vanishes into thin air. Greek debt won’t be the last to be written down. A favorable outcome for Greece will spur other indebted peripheral members to seek debt deals of their own. The most obvious case is Spain where the anti-austeriy party Podemos (“We Can”) Party which was only formed one year ago is now leading the polls ahead of Spain’s elections later this year. Podemos is seen as the Spanish counterpart to Greece’s Syriza. Change happens slow and then all at once. The latter will be a rude reminder to the politicians of Europe as the populist movements use each victory to rally more to their cause.
Investment Idea: The first idea that jumps out is shorting the Spanish 10 year bond. At a rate of 1.38%, Spain’s government can some how borrow at lower rate than the US government. Strange to think, especially considering Spain’s debt has jumped from 36.9% of gdp in 2007 to 95% today. A 160% increase in just 6 years! That certainly isn’t sustainable. Italy and Portugal are two other countries who will most likely be forced to write down part of their debts before this is all over. But I like Spain in the short term due to their impending elections and a popular party willing to challenge the unelected overlords in Brussels.