The Guest Blog

Farrell: Greece—A New Moral Hazard?


"It's Greek to me" is not a recently coined sarcastic jibe. It comes from Shakespeare, actually.

In Julius Caesar, the senator, Cassius asks his co-conspirator, Casca, to report the details of a conversation Casca had with Cicero. Casca answered "Those that understood him smiled at one another and shook their heads, but, for mine own part it was Greek to me."

I have to confess I didn't know that but saw it in a European paper the other day. I'm not trying to impress you that I read European newspapers all the time. I was in a waiting room and there was nothing else to read. Never forget your Kindle is the lesson I learned.

The bailout of Greece has stirred ferocious debate and fallout in Germany, which has an election shortly.

Finance Minister Wolfgang Schauble is insisting that no loans will be extended until Greece commits itself to an extended austerity program beyond just the current year, and the EU unanimously agrees to it. The German indecision drove two year Greek notes to soar to over a 13% yield (US two year notes are a touch over 1% for comparison), setting up an inverted yield curve. Such a curve, where short rates are higher than longer rates, is generally considered a sign of extreme financial distress. Investors are predicting problems sooner rather than later. I see it as a sign that a default of some magnitude hits before long. That has implications beyond just Greece as European banks have significant exposure to Greece and loans/bonds will have to be written down.

The Parthenon in Greece
Scott E. Barbour | Getty Images

And bailing out Greece opens a whole new world of moral hazard, for Greece and for the Euro zone.

I think Greece will be back year after year for additional money.

Over the next five years Greece will face some 240 billion Euros in debt service and refinancings. The burden will approach 150% of Greece's GDP, assuming its GDP doesn't plummet. Interest payments alone, says the Wall Street Journal in an editorial, could reach 10% of GDP by itself. "Far better" says the editorial, "to draw the line now, force Greece and its creditors to take their pain, and demonstrate to markets there won't be a rolling series of bailouts."

For Greece, Spain, Italy, Ireland, and Portugal "the financial crisis highlights the constraints of euro membership" writes the NY Times. "Unable to devalue their currencies to help regain industrial competitiveness, and impelled by European Union fiscal agreements to meet certain budget targets, they are facing years of belt-tightening just when their economies could use a lift from additional spending."

Maybe this whole euro thing needs to be rethought.

Rethinking some emails is probably on the mind of at least one Goldman Sachs staffer. Officials from Goldman are due before a Senate subcommittee hearing Tuesday. Figure that CEO Blankfein can handle himself. How will the self anointed Fabulous Fab, Fabrice Tourre, do is a question/problem. Bragging to his girlfriends in emails about his involvement in constructing complicated financial things could prove embarrassing in public hearings, but note the emails were sent to girlfriends - plural. That might be more trouble than the good senators! It will make for great political theater. After the SEC's inept handling of the Madoff and Stanford cases, the agency finds itself in the hot seat and they have made a very big bet on the Goldman case.

And where oh where is Senator Chuck Schumer, Wall Street's erstwhile friend and representative in the August halls of the Senate overseeing the financial interests of his NY constituency. He has been the recipient of consistent Wall Street largess in the form of generous campaign contributions. He has angered NY Mayor Mike Bloomberg, an outspoken advocate for Wall Street positions. Bloomberg had expected Chuck to join forces with him in the latest go-round over financial regulation. When Chuck was nowhere to be seen, Mayor Mike publically expressed his frustrations to the Republican leader, Mitch McConnell (Rep. Kentucky). With the vote on regulation coming soon, Wall Street has been left in the lurch. The reason could well lie in Harry Reid's battle for re-election in Nevada. If Harry fell, which is the current bet, Chuck has been mentioned by more than one Democrat as a logical choice for majority leader.

Being seen as close to Wall Street would not be a good idea.

Schumer has said that "any suggestion that a leadership position was a driving factor in his position is bunk." He expects and hopes Harry will win and I for one am shocked, shocked that anyone could think differently.

President Obama is trying to play down the recent riff with Israel over the 1600 proposed housing units in East Jerusalem. What prompted his re-engaging the issue was criticism of the administration's position by the aforementioned Senator Schumer. The Financial Times of last Saturday wrote, "Mr. Schumer, who is thought to have ambitions of becoming Senate majority leader" said the White House's open dispute with Israel was " counter-productive." But he is not alone. Seeing where the Congress was going and getting in front to pretend you led them there is a political gift not many have. Almost three quarters of Congress signed a letter to the President asking him to keep disputes with Israel out of the public sphere. Way to go Chuck.

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