Would a Greek Default be Bullish For Europe?
In contrast to the "Lehman 2.0" viewpoint, some argue a Greek default could actually be bullish for Europe and the euro.
What happens when Greece finally defaults?
It's a question the whole world is wondering -- or the whole investment world anyway.
Opinions on Greek default have settled into two camps. One side sees a catastrophic event to be avoided at all costs. The other, a healthy act of cleansing that can't come soon enough.
Angela Merkel, the Chancellor of Germany, expressed her darkest fears over the weekend, arguing that a Greek default would "destroy investor confidence" and could "spark contagion" in the style of Lehman Brothers in 2008.
"We need to take steps we can control," Merkel told her interviewer. "What we can't do is destroy the confidence of all investors mid-course and get a situation where they say that if we've done it for Greece, we will also do it for Spain, for Belgium, or any other country. Then not a single person would put their money in Europe anymore."
On the opposing side, Jim Rogers believes Greece cannot default fast enough -- and says he would buy euros if it did. Via a Reuters interview he explains:
Well I hope that Greece defaults. It would be good for Europe, it would be good for Greece, it would be good for the world. It would be good for the euro if they finally accepted reality and made Greece default, made the people who made the bad loans take their losses, and they made that happen to a couple of other countries.
Everything would go down a lot... but that would be such a magnificent buying signal I would buy all the euros I could at that point, because then we would know we're going to have a sound currency, we're going to have a strong euro.
It's not going to happen, but if it happened that way, wow. Then we'd have a serious competitor to the U.S. dollar.
Rogers admits that, in the event of default, "everything would go down a lot" prior to triggering his buy signal.
The question then becomes, how much is "a lot?" For instance, if Rogers started liking the euro at $1.25, would he love it at $1.10? How about 95 cents?
Financial Times commentator Martin Wolf had a great line last week: "The eurozone then cannot stay where it is, cannot undo what it has done and finds it traumatic to go forward." That about sums it up.
In a bit of irony, Greece played a role in the first known debt crisis more than two thousand years ago. "History's first sovereign default came in the 4th century BC," Bloomberg reports, "committed by 10 Greek municipalities. There was one creditor: the temple of Delos..."
Now, 24 centuries on, the same tiny country is giving investors fits. Either conditions are set to rapidly improve, or they will quickly and dangerously get worse.
Some investors are buying euros (and euro-denominated assets) now -- with blood in the streets -- in the hope that everything will ramp when a sense of resolution comes.
London hedge fund manager Crispin Odey, for example, thinks European equities are "mouth-wateringly attractive," with yields in the 5-6% range.
"It may be confusing to find someone who believes that a crisis is on its way but is also happy to buy equities ahead of the crisis," Odin says to clients. "For me the crisis will bring resolution and with it higher prices."
A Greek exit could be a celebratory event (as far as Mr. Market is concerned), or the trigger mechanism for a new explosion.
This is what makes the current environment so challenging. Serious top-down problems threaten to drive all markets lower (perhaps much lower). Yet at the same time, value investors get bolder with each new leg of decline.
Caution, discipline and controlled risk management are the order of the day. Just about the only guarantee is, when "DEFAULT" hits the financial media headlines, a massive surge in volatility will too.
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