Retail prices for brand-name goods became uniform throughout the Eurozone, pushing prices higher. Property prices, once comparatively inexpensive, began to resemble those in Brussels or Amsterdam. But while prices were on the rise, the power to control those inflationary tendencies through monetary policy (i.e. raising interest rates) had already been ceded to the European Central Bank in Frankfurt.
That was the Catch-22 for Mediterranean states such as Greece: a common currency brought a common interest rate policy, but those rates were only ever going to be set to suit the larger economies in the Eurozone. And those larger economies are precisely the ones which were flooding Greece with liquidity and driving its prices through the roof.
By the middle of 2010, only French banks had more assets in Greece than their German counterparts, and Germans banks likewise had more assets in Spain than banks from any other country.
The levels of capital inflow were so perverse that the yield differential between German and Greek bonds actually reached 6 basis points, or 0.6 per cent… For two countries with such drastically divergent economic fundamentals, this was a ludicrously small gap. To put it in perspective, this would be like a one-man IT start-up company receiving virtually the same loan terms as Apple.
Creditors were all too eager to underwrite this insane risk premium, but when the fabricated boom became unsustainable, those private lenders ran for the hills, refusing to accept any of the blame for, and wanting to share none of the cost of fixing, the mess they helped to create. Money was sucked out of Greece far faster than it entered the country in the first place, and most of that money will never return.
When the ECB and the IMF imposed the austerity plan on Greece as precondition of their bailout, they were in effect forcing Greece to live on a tighter budget than any other country in Europe. But when Greece suggested that the budget could be trimmed even further by cancelling an order for 223 howitzers and a submarine – at a cost of €403 million (more than B15 billion) – they were told this would not be considered. That military hardware was, after all, being purchased from Germany.
In other words, nearly one-quarter of the payment Greece defaulted on in late June could have been saved by cancelling a weapons purchase Greece did not need. Even though Greece’s total defense budget is twice the size of the Nato average (as a percentage of GDP), these purchases had to go ahead, but it was additional spending on healthcare and pensions, which was trimmed.
Greece is not blameless, but it is wrong to allege that lavish pensions or the unwillingness of the Greeks to get their house in order was the sole – or even the main – reason for this debacle.
France and Germany were among the first EU members to fall afoul of the very budgetary rules that they imposed upon Europe, but not a single European institution chose to enforce the law at that time.
When the enforcement finally came, it was too little too late, and there was no hint of regret from the ECB that its own policies may have been even slightly responsible for this Greek Tragedy.
Until this situation is resolved, European equities – and indeed most global equities – remain a crap shoot. Keep in mind this is playing out as US stock markets enter their seventh consecutive year without a correction. There is always one straw that finally breaks the back of a bull market, and Greece could be that catalyst.
This is a perfect time for investors to consider investments that do not rely on equity (or even bond) markets to rise. AHL, Winton, Aspect, Transtrend and Pecora may not be household names, but anyone who has invested in them over the past two decades knows that these funds have held their portfolios together.
In each down year for stocks over the last quarter of a century, the average gain for trend followers has been +15pc. This means, after the 50pc drop in global equities during the 2008 financial crisis, a stock/unit trust based portfolio needed a 131pc gain just to pull level with the average trend follower.
There are literally dozens of world-class trend-following funds that expats can use to diversify their existing portfolios.
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