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Commentary on The Capital Markets- Category [International]

With the Dow futures down 241 points overnight (and more than an hour before the open), erasing all of yesterday's gains and then some, I thought I'd point out a few things that nobody seems to want to discuss in the so-called "media."

First, while the media is making a big thing about "not having to pay any interest on EFSF loans" the fact remains that the debt is roughly 200% of GDP.  The bond principal still has to be paid as it comes due, but even without that interest payments are ~11% of government revenue.

Let's make it real simple for you: The Greek government, were they to erect the finger on all of the debt, would effectively add 11% to its revenue.  Note that the so-called target from the troika is a 4.5% primary surplus.

That is, 4.5% of GDP before interest expense.

So what happens if the government erects the finger?

Anyone who bought and holds those bonds is screwed; they get nothing.  So who holds those bonds?

Banks, mostly but not exclusively.

But what happens to government finance?  It improves -- a lot.

To put not too fine a point on it, Greece has two principal payments due in July and August totaling about 6.5 billion Euros.  To put a number on this Greece has about 240 billion Euros in GDP, so this is about 2.7% of the total output of the economy -- for two payments in two months alone.

This is why the finger should, in fact, go up.  Those who lent Greece money were fools as they could certainly do the math before they lent the funds, and they deserve to lose their principal.

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The usual list of pundits are coming out with their various nostrums about the Greek elections going on right now, and they all focus on one thing -- a debt is a debt, and must be paid (somehow.)

Wrong.

Lending prudence only occurs when the risk of default is present should you extend credit foolishly!

It is beyond question that Greece was extended credit by various members of the EU (and the ECB itself) when it was incapable of paying as agreed under the current economic paradigm in place at the time.

This didn't happen only when Greece "got in trouble", it happened for well over a decade prior; indeed, it can be argued that it occurred on the first first day Greece was part of the Eurozone!

Erecting the middle finger was the right thing to do when Greece first got in trouble and it still is.  Let's remember that the Euro treaties provide no means of forced exit; that is, the members of the Eurozone can refuse to extend further credit to Greece but they can neither force the nation off the Euro nor can they abrogate the duty-free trade access!

When you're spending more than you take in the only sane thing to do is to stop that.  But nothing says you have to pay what you allegedly owe and recourse is strictly defined by the agreement in question.  Virtually all lending to a government is inherently unsecured because there is no property deed given to be held in escrow, as is sometimes the case with private lending arrangements.

In other words you simply take the debtor government's word they will pay.

But nothing binds them to pay.

Even if their Constitution allegedly binds them, Constitutions can be changed through entirely lawful process.

What Greece should do is repudiate the debt.  All of it.  If they need to vote through a change to their Constitution to do that, then do so.  This will immediately cut off their access to further credit but that's good, not bad.

You cannot get out of debt by borrowing more money.  The two options to get out of debt are to pay it down and erect the middle finger toward the creditors.  In the case of a sovereign nation that cannot pay the correct choice is often to erect the middle finger; after all, the other alternative, to run said "primary surplus", requires cutting spending at least as much and nearly always more than does repudiation!

Give the Eurozone and ECB this Greece -- they have it coming:

smiley

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Something to think about with your morning espresso....

Two men have been charged in the US with attempting to overthrow The Gambia's President Yahya Jammeh, the justice department has said.

The defendants, who are of Gambian origin, are accused of conspiring against a friendly nation and conspiring to possess firearms.

Gambian authorities said they had thwarted a coup attempt on 30 December.

I'm certainly no expert on Gambia and its political situation, but my understanding is that the President there is quite the thug.  Further, these two, if the charges are correct, exported weapons and ITAR-restricted items -- and will fry for that, irrespective of the wisdom of the underlying offense under The Neutrality Act.

But I want you today to consider the essence of that law and what it would have prohibited -- and today does prohibit.

During WWI (and WWII) Americans with strong ties to nations invaded by Germany went overseas to fight even though America was not at war at the time.  That would be a federal crime under this statute.

Now consider this: Would the world have been a better or worse place if one of those people had been able to participate in a successful plot to assassinate Hitler before the US entered the war?

Never mind the myriad instances of US "agencies" doing exactly this sort of thing with nations that we are not at war with -- yet those "assets" are never charged under said law....

I understand the general view of what the government is trying to prevent with this sort of law..... but the question remains:

Should it be on the books at all, given the historical record, or is this yet another attempt to define that which free people do, complete with the attendant risks they assume, when they act without state backing in such a matter?

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