Shake Well Before Using

Early May 2012

It seems to me eventually Greece is going to have to leave the euro. Equity markets are still of the view that an exit would be disorderly and catastrophic for the rest of the euro bloc, the world economy, and equity markets. I’m inclined to disagree. I think a Greek exit, if handled properly and if the European authorities stand their ground and make absolutely clear that they will employ their firewall funds to effectively defend Spain, Italy, and Portugal, would be bullish for other equity markets around the world that are currently being pummeled. The other European countries have their ailments, but Greece has a malignant cancer that needs surgery and radiation.

The recent Greek elections showed that the “Greek street” has had all the austerity it will accept. By some measures, Greece has had a depression of deeper magnitude than the U.S. experienced in the 1930s. Now, the newly empowered political parties are refusing to honor the terms of the country’s international loan agreements. Chaos reigns! Within the euro bloc, Greece has years of even deeper pain ahead. Greece desperately needs its own currency and a major devaluation to restore its competiveness and to begin curing its ills. A devaluation (surgery) would cause massive “creative destruction” in Greece but buy the time to implement the reforms that are so essential.

The Greeks seem to be relying on the rest of Europe to come up with the funds to kick the Greek can down the road ...

Get Diary of a Hedgehog: Biggs' Final Words on the Markets now with the O’Reilly learning platform.

O’Reilly members experience live online training, plus books, videos, and digital content from nearly 200 publishers.