The Stupidity of Hope: Greece Is Still Going to Default

Tuesday, 31 May 2011 | 12:19 PM ET

Keeping in mind that the words “hope” and “Greece” should almost never be used in the same sentence, here would be the one exception: Let’s “hope” markets aren’t rallying on “hope” for “Greece.”

Hope, apparently, does spring eternal, however, and it seems as though despite all the evidence to the contrary, there are still people out there with money to spend who believe that Greece can be rescued yet from its seemingly intractable fiscal position.

How else to explain Monday’s surge in the euro and drop in the US dollar, which had been rallying on well-placed hopes that the periphery of Europe was sliding further into the debt abyss and ready to implode?

Irrationality, we now can conclude, comes in many forms.

The latest form is in some weakly substantiated murmurs out of Germany that the core of the core of euro zone nations might be softening its stance towards a Greek bailout and is ready to ease its demands that the nation speed up its ultimately unavoidable debt restructuring.

Despite compelling evidence that Germany is in no political position to turn suddenly benevolent towards its free-spending weak sister to the south, the rally was on.

US equity markets surged, the dollar tumbled against the euro, and once again all was fair and right in the world.

“We shall mince no words: We are stunned; shocked, surprised, amused; bemused and put-off by the fact that the EUR has rallied on this news. It makes absolutely no sense whatsoever to see the EUR rise on these sorts of rumors,” fumed “The Gartman Letter” author Dennis Gartman. “Sometimes, as Keynes reminds us, ‘The markets can remain irrational far longer than we can remain solvent.’ This is one of those times.”

As morning turned into afternoon and traders got another stark view of the US economic slowdown, even the Greek optimism couldn’t sustain the rally.

But the earlier jump in futures and surge at the stock market open showed that there are plenty of people out there who haven’t gotten the memo yet: Greek debt will be restructured. It’s a pay-me-now-or-pay-me-later Faustian choice that will cause only more damage the longer it is delayed.

(Peter Tanous and I clearly diagnose the problem in our newly released book, “Debt, Deficits and the Demise of the American Economy.”)

Markets Higher on Greece Bailout Hopes
Discussing whether it makes sense for the markets to rally on hopes of a Greece bailout, and poor economic data, with Richard Madigan, JP Morgan.

Among other obstacles, rank-and-file Germans will not allow their own fiscal prudence to be undermined by the mind-boggling recklessness in Greece. And Greeks will keep the streets teeming with protests should their leaders try to meet austerity demands from the International Monetary Fund and the euro zone.

Also, Greece is incapable of growing its way out of debt, and the Maastricht agreement prevents it from devaluing or inflating its way out.

In short, Gartman is correct when he says, “the risk of an eventual debt restructuring has obviously not eased.”

“The can has been given a good solid kick down the road and for a day or two or a week or so the problem has been postponed, but the problem exists nonetheless,” he wrote. “Like aspirin applied directly to an ailing tooth, the pain has subsided of course but the decay still exists and the pain will come back at a later time and almost certainly shall be more severe, not less.”


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