Greece: After the Euro

I have been saying for some time that it is impossible to second guess the way the eurozone mess is going to go because of the continued idiotic interference of politicians. I have also said that the euro is a currency that survives purely on confidence. Well, I think we have just had a serious change in perceptions.

Confidence in Greece using the euro is evaporating fast. Once that mood gets enough traction it will be impossible to stop, and the country will be forced out of the eurozone simply because it will become a monetary wasteland.

Those of you who read the New York Times (probably not a lot) will have noticed some interesting articles recently about Greece, Italy and Spain.

The news is that large corporations in the US and other countries are preparing for a Greek exit from the euro. Several companies, including Visa, say they can cope with a Greek exit within 24 hours, and they have contingency plans for a new currency. It looks as though politicians are going to be side-lined on this issue at last.

The problem is one of confidence. All fiat currencies rely solely on confidence. Hard currencies are backed by something else, usually gold, maybe oil. Fiat currencies are backed by consensus. If you look at a euro note you would be hard put to work out what it really is, who printed it, who guarantees it, and what it’s supposed to be worth. It might have a 20 written on it, but what that 20 is worth is another matter.

The fact that more and more international companies are questioning Greece’s ability to survive within the eurozone (which is really so obvious only a politician cant see it) means that confidence is going. With that gone, the currency is effectively gone too. It’s no good a politician saying we can paper it over. If no-one believes the politician, that statement is worthless. International businesses have simply stopped believing the politicians.

The question is, who is going to pay workers, and with what. Greek companies will have to do what they have to do, but what about international businesses? What about trade? Most firms dealing with Greece are already demanding money up front. Banks are already organising transport mechanisms to get bags of cash over the border to pay workers. Obviously with a currency change all banking will come to a halt.

This also means that companies have emptied their Greek bank accounts. All this worsens the situation, and it is clear the euro in Greece already has no international value. There could still be a proper rescue but the effectiveness of that rescue would have to be believed. Unfortunately no-one believes there can be any effective rescue. One of the major political problems is the stark reality that Greece has not put in place a single reform demanded as part of the previous bailouts.

If you look at the fundamentals, Greece is in a far worse position now than it was three years ago. It long ago went beyond the point of no return. Businessmen are realists. I would say it’s over.

The real question then is, what happens about Spain and Italy? I note the airlines are making contingency plans for a Spanish exit. I think that might well be good for Spain, but it will put enormous pressure on Portugal if Spain does decamp. I’m not convinced at this stage, but I think it’s all over for Greece. If the politicians hang it out much longer they will do enormous damage to the whole european economy.

There are interesting times ahead. Let’s just hope we can get the Greek thing over and concentrate on the next problem.

A massive devaluation is on the cards for the new currency. That will make property cheap. But it wont solve the dead-beat state of the economy or the various restrictive practises which are still in place, and look likely to remain, or the massive government subsidy situation, which presumably is about to recoil from a serious shock after the bailouts stop.

One other interesting fact. Forgers have stopped bothering to forge euro notes. That is significant. If the forgers dont think the currency is worth forging what the heck are the rest of us to think?

Now might be the time to start looking at nice tourist spots with a view to buying after the crash. But do wait for that crash, it’s coming.

john

What’s Next?

I’ve just deleted this week’s blog on the housing market. It’s a waste of time.

The strongest currency in the world appears to be the Norwegian Krone. The weakest? God knows. The euro? The yen? The US dollar? Sterling?

It’s all become a joke. The US is bankrupt, half of Europe is bankrupt, and yet life goes on. The euro isn’t worth a lot, so they print some more. Greece cant pay its debts, so Greece just takes on more debt. It’s just surreal.

I still think that somewhere along the line common sense has to poke it’s head up through the idiocy. Perhaps not. I still think interest rates in Europe are going to have to go sky-high or several countries are going to have to go bust, which will bring down half the continent’s banking system. Perhaps not.

It is quite possible that sometime soon those holding properties with a high level of debt are going to be squeezed. It is also quite possible that those buying any property in the eurozone with foreign currency are going to see a big loss. Anyone buying in Greece now has to be a lunatic. Probably the same is true of Ireland and maybe Portugal.

Italy’s largest bank is bust. Things will probably get worse in Italy, and maybe in five or six years time, maybe in ten years, then will be a great time to buy. I can wait.

I have always said that now is not the time to make investments in Europe. If you have euros, by all means put them in property, but dont convert into euros and then buy. As Shakespeare once said: “Something nasty this way comes.”

Real estate: what to do with it? Live in it, that’s all.

john

Greek debt, and bargain prices

I think it’s about time I wrote another article on the UK property scene.

I would not advise anyone to get into the UK property market at this time. I dont know what will happen after the election (I am writing this in the morning of May 4). I have no idea how the election results will pan out, but one thing I believe is that we have not been told the whole truth about the state of the nation’s finances.

I fully believe Gordon Brown has made a serious cock-up. His government has spent far more during the good times than it should. There was no savings provision made during the good times, so now the bad times are here the cupboard is bare, and the government’s expenses are way beyond their income. There has been no attempt to cut back. Profligate and irresponsible are the only terms that fit the situation.

At some stage in the very near future someone is going to have to do something about this mess. Government spending has to be drastically cut. Taxes also have to be raised, and interest rates will have to go up.

If government spending is cut, that will lead to job losses. The unemployment rate will rise. That will be bad for housing.

If taxes are raised, that will lead to a cut in household expenditure. Quite simply, money will be siphoned out of the family budget. That money will not be available to put towards housing spending. House prices will fall.

If interest rates go up, that will impact on the cost of mortgages. What is important in the housing market is the cost of a house, not its price. If it costs an extra £100 a month to fund your mortgage you will have a problem. If your mortgage is going to cost more, then you will have to lower any offer you make on a house purchase. House prices will go down.

I have said many times before. Buy when mortgage rates are coming down. When they are down they can only go up. I guess they will shortly be going up. Beware!

The Greek mess will not be contained. First; Greece will not be able to cope. My guess is that money is right now being taken out of Greek banks and sent abroad. That will wreck their capitalisation, and make the whole mess even worse. No-one is going to want to lend Greece money when there is a serious risk they wont get it back. I cant see how the government can do anything other than default. When, seems to be the only real question. At the moment companies are worried about exporting goods to Greece as they fear non payment. This mess is real and getting worse. The bailout just keeps the lights on, it doesn’t solve the underlying problem.

Even if the country comes through this, it will be in recession for years. Wait for the default, devaluation, or whatever, and then you might find some interesting buys. But one thing is for sure, there isn’t any hurry.

This mess is going to have a domino effect, and next in line is Spain. There is a fascinating chart in the New York Times showing the cross borrowings in Europe. It is a right tangle of loans that just aren’t going to get paid. This will lead to serious banking lock-up which will be bad for housing, bad for business, and….. just plain bad. You should not be buying in Spain, Portugal, Italy or Ireland. There will be better deals some considerable time down the road.

Now let’s take that bad stuff across the water to the US. For those of you thinking of investing in “bad” areas in the US, you might like to take a look at this letter, which landed on my desk this morning, courtesy of a financial newsletter I receive:

“I am a housing inspector and property manager for much of Detroit,” another reader writes, referring to our observation that stealing valuable commodities from vacant homes is back in vogue.
 
“I worked with a California couple who bought seven houses from another manager around Detroit. They weren’t happy with his performance or communication. I was contracted to see if I could rehab two of the houses in their portfolio. Upon arriving, I found each house without boards. The house was boarded up prior, but sat for a year. The thieves stole the aluminum porch covers and back porch cover. No biggie, happens all the time. But then upon going inside, I saw the thieves took the bathtub, toilet, sink and every single small octagon tile in the bathroom. Now, that’s a first for me on any level. Every lead window was gone.
 
“If you don’t have someone living in the house while it’s being rehabbed or without a renter, you will lose your furnace, water heater, lead glass windows and copper if you have any. Needless to say, I have some scruples and told the couple to just let these two houses go, as the rehab alone would be way over what the home will be worth in 10 years.”

It’s back to what I said at the end of last year (and the end of the year before). Hang up that notice: Gone Fishing, or go to Brazil.
john