GO
Loading...

Farrell: Greek Crisis Begs US TARP-Type Solution

We all remember the movie "Sound of Music" with the incomparable Julie Andrews. My granddaughter's favorite scene is the gala party at the Baron's house when the kids sing goodnight. So long, farewell, auf wiedersehen, goodbye. Adieu, adieu to yieu and yieu and yieu. Well, yieu and yieu and yieu might well be Greece, and Portugal, and Ireland.

The Von Trapp Family from the Sound of Music.
Source: 20th Century Fox
The Von Trapp Family from the Sound of Music.

It had to happen.

The idea of a European Union sounded so good, but the question always was when push came to shove, what would prevail: country or union?

The Germans are understandably fed up with the idea that they should bail out their profligate southern cousins. Greece seems unable or unwilling, or both, to come to grips with how dire their situation is.

A very good articleon the second page of the business section of Monday's NY Times by Martin Hutchinson details why they will be dragged kicking and screaming into bankruptcy.

Hutchinson says the Greeks may well need to leave the Euro and return to the drachma. To do so would require a decline in Greece's standard of living of 18 to 50 percent, depending on whether they need to decline to Portuguese levels or Bulgaria's more depressed-type economic environment. The article does an admirable job of explaining why.

I doubt the Greek population gets it.

They were living well and don't want to stop. But Germany may well be sailing away. The rumors are Germany is preparing a "Plan B" that allows the Greek bailout to go poof and the German banks are reinforced, if needs be, by their government. It sounds like the US Tarp plan all over again. And it will easily work for Germany. Many German banks won't need government funds. But there has never been any doubt about Germany's ability to care for its own. The Euro zone has been banking on Germany taking care of everyone. Now the French banks are thought to be under scrutiny by Moody's for a downgrade.

The French bank exposure to Greek debt is thought to be 65 billion Euros and it is likely being carried at par on the books, which is insane. Greece will run out of money soon and , if not bailed out — again, this paper will have to be written down. France can probably save its own banks, but it is much harder with a common currency and the standard is set by Germany.

The fear in the US markets is clear enough. If Greece defaults, does Portugal and Ireland? The credit markets are closing to those countries and will they run out of cash? Will Spain and Italy come under further attack? Can the European Central Bank hold things together? I ask rhetorical question since that is the uncertainty in the market.

For what it is worth, I think a US Tarp type program is needed. Have the EFSF make equity investments in banks that the banks can call at later dates. The ECB and the EFSF have been targeting sovereign bailouts and secondary market bond purchases. That is sort of like what the Tarp was originally going to do, until it shifted and invested directly in the banks. Sorry guys, moral hazard wins out.

If we remove the equity question, debt will be easier to sell. Germany is allegedly saying they are planning for an "orderly" bankruptcy of Greece. Unless there is a support system that goes beyond German banks, there will be no order.

Vincent Farrell, Jr. is chief investment officer at Ticonderoga Securities and a regular contributor to CNBC.