Wednesday, May 6, 2015

Things could be worse for Greece if it exits EU

I think the politicians in Greece have to talk in a certain way to get elected – 'We are going to take a tough line against the Europeans' – and that is how they appeal to the masses and they get votes. But at the end of the day, once they are in power again they are lot more pragmatic and they are going to actually look at the situation. If they actually leave the eurozone, then what are they going to do? Then the country is going to implode, the currency is going to collapse, and now they are going to have to impose austerity on themselves. At least now they can always blame it on Germany or Brussels. If they actually leave the eurozone then who do they have to blame? They are going to have to stew in their own brew.

Everybody thinks that it is going to be terrible for Europe if Greece leaves. Look, it could be the best thing for the eurozone to have a sacrificial lamb, to let Portugal or Spain or somebody else have a good look at life after the euro and then maybe they will be shocked into making some reforms, kind of like scared straight, and say, 'Hey, look. I don't want to end up like Greece so let's start cutting back on government spending now so that we don't have to leave or get kicked out.'

You can't have Greece holding everybody else hostage by saying, 'We are going to leave unless you keep giving us more and more money.' That is an even greater moral hazard because that sends a message to other countries to do the same thing if there are no consequences to being reckless and there is no reward for being frugal or prudent. They just can't cave in to Greece's demands.

But I feel bad for Greece in that it was government moral hazard that enabled the Greek government to get so indebted in the first place. It's just like what we have done in the US. We did the same thing. Look at all the money Puerto Rico owes, the debt crisis there. Why does Puerto Rico owe so much money, and why were they able to borrow so much money in the first place? It's because the US government made Puerto Rican debt tax free in all 50 states and so muni bond funds were eager to gobble. Plus, by keeping interest rates so low everybody was chasing yield, and they found it in Puerto Rican bonds. Puerto Rican politicians then took advantage of all that demand by borrowing money at artificially low rates and using it to buy votes.

Now they are in trouble, but they would not be so highly indebted but for our tax code and the Fed. Politicians just do what politicians do. They are always looking for a handout. That's how they get votes. They promise something for nothing and cheap money allows them to deliver on that promise until the bill comes due. And it always comes due, whether it is Greece or the United States. We have been throwing this party a lot longer then they have and we are in much worse shape. When interest rates go up the real Greek tragedy will play out in America.

Peter Schiff is a smart investor and author of several best selling books. He correctly predicted the economic meltdown of 2008 - 2009