Justin Skyline

Losing its marbles but rebuilding the temple

07 Apr 2017

Justin Urquhart Stewart, Co Founder and Head of Corporate Development

The Greek debt issue is back in the headlines and no one seems to be able to come up with a viable solution for its resolution. Justin, however, is able to point to the past for a lesson as to how Greece could achieve some success in putting the weighty problem behind it.

Now we all know that Greece has become a bit of a basket case as far as the Eurozone is concerned, at least economically. However, it’s not the only one - many others qualify for that tag in specific sectors too. One example is the world's largest hedge fund (if you look at all the derivatives inside it) also known as Deutsche Bank, and another would be the company with the inability to master the truth about its emissions i.e. Volkswagen. The British could warrant the label for having a most unsuitable foreign secretary - that is apart from Brexit...well I won’t go there at the moment…


However back to the Greeks. For reasons not worth examining now, the Greeks were warmly welcomed into the Euro club with everyone knowing that their financial figures were about as reliable as the roof of the Parthenon. But little facts like that were not going to get in the way of a jolly good party and so the Greek economy crossed the river Styx and entered the economic world of Hades.


The country had been living beyond its means for years and feckless politicians had recklessly borrowed money to smooth their paths to power, leaving the debt to the next generation. So, the country ended up with a debt to GDP ratio of 179%, and is only beaten to the top of this ignominious list by Japan which notches up an impressive 229%. Let me put this into context: we often moan about our numbers, but the UK comes in at a mere 88% and that’s only just ahead of Germany at 80%.


So, over the past few years, the reality has finally hit that Greece is not going to be able to repay or even barely maintain their debts. Something had to be done. However, rather than addressing the issue properly, it has (in effect) been regularly kicked forward day-by-day in the vain hope that something might miraculously change. Germany has been steadfast in its refusal to write-off any of the debt, which is quite the sensible view given that if the Greeks were to be let off then all the others – such as Spain, Portugal and Ireland – would demand similar debt forgiveness.


The result though has been the slow strangulation of the Greek economy that has already shrunk by a quarter with little sign of much improvement. This frankly is irresponsible politics and devastating to the citizens of Greece. I suggest it’s time for some radical common sense to try and address this effectively.


Although some of this has been done, the scale so far does not seem to have had much effect. I am, of course, referring to the debt timetable and the extension of debt repayment profiles, so that any ten year debt became fifty years and fifty years became undated perpetual debt. That, at least, could address the cashflow concerns in part.


The main issue is the attempt to try to get the basic economy functioning again. One answer for this lies in the application of a technique that was used quite successfully in both Belgium and South Africa. The idea would be to split the currency into an external currency, namely the Euro, and a domestic currency called potentially something like the Drachma - or maybe even something more imaginative like the ‘Olive’. Obviously the domestic Olive would depreciate immediately, and the cost of imports to Greece would rocket leading to an inevitable bout of inflation, but equally (of course) Greece's exports and sources of income would become so much more attractive.


Now Greece is obviously not much of a manufacturer and exporter. However, olives and olive oil would become significantly cheaper to the outside world. Meanwhile Greece's major earner in the form of tourism would really benefit. Greece would once again become the discount holiday destination of the Mediterranean and funds coming in would start to flow again.


Obviously there is some pain associated with this action as domestic costs and inflation would be affected. The external debt would stay as is, but in effect would not change as it becomes ‘perpetual’ debt that never needs to be repaid. Well, it never was really going to get paid anyway, so no change there then!


What it would mean is that the economy would start to move again and, in due course, the Olive would (as in any good Martini) start to rise – not to the value of the Euro, but it certainly would not need to be called the Zero. So, from a position of perpetual economic winter, the country could start to move out of the economic malaise by growing again and at least that would provide some hope to a nation plagued by the financial philandering of its previous leaders.


But will the European Central Bank do it? Or would the Germans allow it? I doubt it, but frankly it seems the best alternative in a bad position.


And finally....... with quite a few equity markets around the globe reaching all time highs, I can quite understand the fear that some investors have about buying in at what may well appear to be the top. Well here is the answer – an investment that has built in highs as part of it: marijuana!


With the increasing supply in the legitimate growth of the stuff, there is now quite the range of companies either producing it or using it in related industries. In fact, there is now probably enough to create an index covering this somewhat clouded sector. And, once you have an index, you can have a tracker fund and so create an Exchange Traded Fund (ETF) to hold and trade the sector.


How would it perform? I have no idea…but after a couple of puffs, I’m not entirely sure I would care if its effects are to be believed.


This market could continue to roll on – or is it roll up? Oh, I never could do that!


Have a good weekend,

Justin Urquhart Stewart
Co Founder and Head of Corporate Development

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The value of your investments and the income from them may go down as well as up, and you could get back less than you invested.
The value of your investments and the income from them may go down as well as up, and you could get back less than you invested.

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