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Michael Power from Investec Asset Management discussed the Greece/EU talks which have broken down, and potential outcomes of a deal not being reached with Alec and Gugu in the CNBC studio today.
Michael, your quick analysis of the situation: is Greece in trouble here?
I think everyone is in trouble, not just Greece. I think that the Euro team has underestimated the commitment that the Greek negotiating team has to doing something completely different. I don’t think they quite understand that the Electorate of Greece has basically, decided that enough is enough and they need to come up with a different way of approaching their problems.
What would that ‘different way’ entail, if you could potentially be an advisor?
Broadly speaking, I think we’re at two potential outcomes. There are many variants within each, especially with one of them. The obvious outcome is that Greece ends up leaving the Eurozone and the Drachma returns. It defaults on its debt and probably has a period of two years of cold turkey after which, potentially, at a lower exchange rate the Greek economy starts to recover. It would be a very painful route because it would probably involve the collapse of the Greek banking system and its nationalisation, for example.
The other route is a really fundamental route and branch (we think) of the way in which these sorts of programs are put into place. It’s not just a case of extended pretend[inaudible 01:33], which is what’s happened in the past. They need to write off some of their debt, which is 175 percent of GDP. They need to understand that Greece probably cannot live with generating a four-and-a-half percent of GDP surplus, just to pay the interest on its debt and to have the fiscal austerity, which is part and parcel of past agreements. That’s not something that Greece, which is an Electorate and SYRIZA, which leads the current parliament, is going to accept.
Berkshire Hathaway’s Charlie Munger equated Greece to a brother-in-law in a family business who spends his day with the family company’s credit card in the country club, buying drinks. Is there a solution?
There is but I’m afraid it’s going to have to involve the Europeans in particular, in the way they put these programs in place. Debt write-off is going to have to be part and parcel of it and I’d like to remind everyone that in 1953, the Germans themselves were beneficiaries of a 50% debt write-off after World War 2. Interestingly enough, the Germans owed the allies at the time, of which South Africa was one of them, huge amounts of money and they wrote that down by 50%. There’s a German approach of ‘we’re not going to cut the debt’. It’s all very well and good, but look at your own history, Berlin.
The German Finance Minister, Michael Schäuble, says that the Greek Government is acting irresponsibly, while the Greek Prime Minister says that what’s being proposed is absurd. Is there a middle ground? How would you advise them?
I really think that the negotiators from the Euro side are up against a very different group of people this time. What he’s saying when he says ‘irresponsibly’ is that they’re not playing by our rules. The fact is that the current Parliament in Greece has actually, elected a team that wants to play by a different set of rules. What are we to say, of Greek democracy? Are we supposed to ignore it?
I think it’s a very different team and I’m always reminded of the simple fact that the Greek Finance Minister is apparently the only Finance Minister in the entire Eurozone who has a degree in Economics. He’s a very smart man and he’s not going to be easily bamboozled by a team of people that’s been assembled to negotiate against him.
If he doesn’t like what he sees, he’s going to say ‘no’ and I think he’s gained a reputation of some note. He understands these things. He understands the game of negotiation and in the final analysis, I think the Greeks have resigned themselves to fact that if they can’t get a deal they can work with, they’re going to have to turn the tragedy into a drachma and leave the Eurozone.
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