The Impact of a Deficit in Greece and Australia

Seriously, is this thing still going on?

‘Creditors tell Greece it is time to decide over bailout’ reads the headline in the Financial Times. The Financial Review goes with ‘IMF abandons Greece debt talks in Brussels as Tsipras told to cut a deal’.

The mainstream media always casts Greece as the renegade actor in this long drawn out saga. But as I’ve pointed out before, Greece is simply standing up to their creditors and pointing out the absurdity of the ‘bailout’ programs.

That is, the money coming in from the IMF or whoever else goes straight back out to repay the IMF or whoever else. And the banks that fed Greece the money in the first place now feast on their foie gras thanks to the IMF bailing them out.

So let’s be clear here…the banks got the bailout, not Greece.

The only thing that Greece gets out of it is a concessional borrowing rate of around 2%. If they defaulted on the outstanding debts, the market would set the interest rate and it would be much higher. So high in fact that it would prohibit all but the most urgent borrowing needs.

Which is the whole point of allowing the market to set interest rates in the first place. It ensures countries don’t get into crazy debt situations.

On the plus side, a default would probably see Greece return to its national currency, the drachma. It would devalue versus the euro and immediately improve Greece’s competitiveness.

Yes interest rates would be high but if Greece continued with its reforms, rates would quickly come down. That’s because Greece’s finances have improved considerably over the years (if you assume they default on the outstanding euro debt, or a portion of it).

Check out the chart below, which shows Greece’s current account balance on a quarterly basis. As you can see, it’s trended higher since around 2008. This means the current account has moved from a deep deficit to a near surplus over the past few years.




Source: tradingeconomics

Click to enlarge


The current account represents the trade balance plus net earnings from foreign investments. In Greece’s case, the current account is negatively impacted by a trade deficit. A lower, more competitive drachma would fix that up pretty quickly.

That would get the current account into surplus, meaning Greece would have little need for foreign borrowing.

Leaving the Eurozone would undoubtedly come with some hardships for Greece. But within 12–24 months their economy would be thriving…that’s assuming they stuck with the reforms that have improved their current account over the past seven years or so.

When it comes to Greece, that’s a big assumption…

The point is a default and euro exit would not be as bad for Greece as the euro elite are making out. They want to discourage it as much as they can because other countries suffering from long term austerity measures would see the Greek recovery and ask why they don’t do the same thing.

But the problem is leaving a national currency and monetary policy in the hands of self-serving bureaucrats and politicians. Then you end up with a situation like we have in Australia.

That is, a chronic current account deficit (see chart below) where you have to borrow constantly from abroad to fund your lifestyle.



Source: tradingeconomics

Click to enlarge


That we are still running $10 billion quarterly deficits after enjoying the biggest commodity boom in history should be deeply concerning. But it doesn’t seem to be.

In fact, it hasn’t been cool to worry about the current account since Paul Keating raised the banana republic issue back in 1985. I predict, in the next few years, the banana republic will be back on the agenda.

No one really seems to think it’s a big deal right now. And it isn’t…until is it. And it will be at some point. It’s just that no one knows where that point is.

When a nation runs a current account deficit, by definition it must run a capital account surplus too. This is just another way of saying foreigners finance our excess consumption.

The thing is, we have no control where the capital goes. So foreign capital coming in and buying up residential property and agricultural land is a direct result of Australia running a current account surplus and consuming more than it produces.

In turn, this is a direct result of butchering our manufacturing industry and relying exclusively on digging up dirt and sending it to China for our export income. Now that has failed, we ‘export’ our land and sell-out our young instead.

Smart, hey?

Adele Ferguson wrote about this the other day in The Age:

With the mining boom over and the economy struggling to transition, state and federal governments need to ask themselves why the so-called clever country ranks 116th out of 142 countries when it comes to converting research dollars into innovation and commercial success.

To put it into context, the OECD estimates that Australia spent a minuscule 0.227 per cent of GDP on research and development (R&D) in manufacturing in 2011, compared with 1.29 per cent for the US and 1.33 per cent for Germany.

Why does Australia rank so low? Because politicians are too busy looking at their property portfolio’s to give a damn about the long term future of this country.

Domain reports that Treasurer Joe Hockey has a farm he owns in North Queensland up for sale. That’s only a start as far as his family’s property holdings go…

The property is part of Mr Hockey’s extensive real estate portfolio including a house in Sydney’s Hunters Hill, which was bought for over $3.5 million more than a decade ago.

Last year Hockey sold off a separate 41-hectare farm in Malanda for $600,000, which he had acquired in 2010 for $520,000.

The Hockey family have also turned over an additional $1.6 million in real estate since 2008, including a one-bedroom pad in Sydney’s trendy Glebe (bought for $310,000 in 1993) and a two-bedroom apartment in a high-rise tower in harbourside McMahons Point (bought for $560,000 several years earlier), also in Sydney.

Federal members’ pecuniary interests – in which politicians and their spouses disclose personal matters from assets including real estate, to company directorships and hospitality perks, like airline upgrades – reveals Mr Hockey has two properties to his name, including the advertised Malanda farm.

Ms Babbage [ed note: his wife] has four properties in her name, according to the pecuniary interests list, including the Hunters Hill home and the Malanda farm.

I don’t begrudge anyone the opportunity to work hard and build wealth. If they want to do so via a property portfolio, go for it. But when the nation’s treasurer is so badly conflicted, and stands to gain so much from continued gains in property prices, what hope is there of reform that improves the market for all Australians?


Greg Canavan+,
For Markets and Money, Australia

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Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:


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