Monday, May 14, 2012

Can Greece take down the world?

All of the current discussion about Greece causing a Doomsday is starting to sound more and more ridiculous (which is the funny part). Nonetheless, the underlying factors could be a far more serious issue. Here's why:

Funny aspect # 1

The country of Greece is comprised of less than 0.5% of Global GDP! It is pretty understandable that when the U.S. sneezes, the world catches a cold- after all, the U.S. is nearly 30% of the world’s GDP. But can Greece cause a global slowdown – I really doubt so.

Funny aspect # 2

There is a report from the IIF that was prepared to scare some of the hesitant lenders into signing off on the country’s bailout package. Through a series of 'well reasoned' arguments, the report discusses a global slowdown due to Greece’s default. Now, how all of this would be achieved by such a minuscule economy like Greece – which is less than 0.5% of the global GDP- has truly made the IIF report a hilarious read.

Funny aspect # 3

In the debt deal of February 2012, private creditors were quoted to have forgiven more than half of the Euro 200 Bn of outstanding. If forgiving more than 50% of a loan is a 'deal', then what in the world does a default mean?

Funny aspect # 4

Which brings us to the next aspect of our humorous stroll- If this 50% 'forgiveness' didn't cause any real blip on the global economy, will the default of remaining 50% cause a global slowdown?

Of course, if this were to really happen, then the economists would surely begin to discuss CDO losses and the contagion effect. This leads us onto the following serious issues:

Serious issue # 1

Several banks and institutions will certainly go down, and countless jobs will be lost. What will become of the bankers who are going to be held responsible for writing those CDO's on Greece? More importantly, what about the politicians who are going to lose power? Let’s think of them for a moment. I would think that in such a scenario, countless big-wigs in banking & finance industry would no doubt be joining the hall of shame along with Alan Greenspan, Dick Fuld and many others. Some of these people could likely get prosecuted, and possibly even join Maddoff’s ranks as well.

Serious issue # 2

Every economic crisis, including the most recent one beginning in 2008, clearly portrayed the lack of integrity and competency in the so called business leaders who are supposed to be examples of these very qualities. Furthermore, after every crisis, skeletons started to tumble out of the closet. Here are a few examples; they almost sound funny

  • Some of the rating agencies were later stated as saying that they had made mistakes in their excel spreadsheets and models, resulting in more than a few incorrect evaluations. Imagine that- a world crisis caused by a few excel mistakes; and the men who are responsible for those mistakes are supposed to be CPA's , CFA's, PhD's and MBA's. This calls not only calls into question the very competency of these professionals, but more so the leadership within the company.
  • Only the relatively junior level executives who created those CDO's knew what they were actually comprised of, yet they did not have the experience to understand the risks and future implications. Furthermore, the senior leaders- who had the experience to understand the risks- didn't completely understand how the CDO's were structured, so they preferred to count their bonuses, rather than to show their ignorance.

In conclusion, the question to ask is- can a minuscule economy with less than 0.5% of the global GDP cause a Doomsday effect, or are the business and political leaders really afraid of something else?