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Grece SirenSirens were mythological Greek creatures of enormous beauty and malevolent disposition, which lured sailors to their death with their enchanting voices and music. It was said that any sailor that would hear them would be so attracted to them that they would invariably turn their ships to find them only to die shipwrecked in the rocky coast of the sirens' island.

On April the 10th, many investors heard the Greek Sirens' calls and responded with their wallets. After an absence of almost 5 years, the Greek government returned to the bond market to sell government bonds. Not only was the issue an uncompromising success, but there were so many bidders that the bonds sold at a lower interest rate ("only" 4.95%) than previously anticipated.

There are two points of view regarding this event. Government organizations, particularly EU headquarters as well as EU countries hailed this event as a fantastic sign of Greece's recovery. They did point out that there is still much to be accomplished, but that Greece was headed on the right direction. Well, at least this is the point of view of parties with vested interests.

The second point of view came from independent places. They described this bond issue as the consolidation of yet another monstrous Ponzi scheme at a country level. They believe that this is nothing but yet another example of the institutionalization of fraud at a massive scale.

The truth, as usual, lies in the eye of the beholder. Before we dive into it, let's see what the numbers have to say by themselves. To the graphs!

Greece Debt In Euros

This graph illustrates the massive government debt and it shows that even by the rosy IMF forecasts, Greek debt is going nowhere even under the best case scenario considerations.

Greece Unemployment Rate

This graph also does not paint a pretty picture. Even the IMF believes that unemployment will keep growing, at least for a year or two and then, it will miraculously drop. Right…

Greece Debt as Percentage of GDP

Even as a percentage of GDP, Greece's debt looks awful at a 160%, which will continue to keep growing (for "only" two years more according to the IMF - OK…).

Greece Government Expenditures

This graph tells a story, but it is not what you may think. By making numbers relative to GDP, a horrible truth is hidden. The GDP is not net income, it is gross income. Furthermore, IMF assumptions are based on the Greek government to be able to pass and sustain austerity measures. Sure… any time now.

Greece Project Default Indicator

And lastly our little Project Default data, showing that Greece has been a zombie country for quite some time, and even by IMF forecasted numbers, this status will not change for the foreseeable future.

And there you have it, dear reader. Greece, a country with massive debts by any relative or absolute measure, incredible unemployment, government expenditure out of control and a dooming default index managed to sell debt to "investors". OK.

Allow us to put this data in a more common-sensical format. Let's assume that you are an investor banker. You make money by lending money to business and getting a piece of "the action". Somebody approaches you in a dark alley and…

– Psst! Psst! Hey, buddy! Would you like to make a few bucks? Boy have I a bargain for you. Look I have this company, it's called Groks Inc. that has a current… err… cash flow… yeah… that's it… cash flow problem and it is looking for a sponsor. Let me tell you about it.

Its debt is a little bit high at only 180% of all yearly sales.

Its expenditures are only 53% of sales.

It just fired 24% of its workers because it can't afford them.

But hey! Not to worry. It's been like this for the last ten years or so. No reason to worry whatsoever. Besides, look, the forecasting agency Scams-R-Us just came up with a new report stating that Groks Inc's future is bright! Sure, it will take a little bit to get there, but this is your opportunity to invest at the basement level. Invest now buddy, it's a you can't miss opportunity of the lifetime!

Would you as investment banker by into Groks Inc?

Well in order to answer this question, we need to dig a little bit into business analysis. Some people would smell a rat and they would be correct. Consider the following.

Stating the debt in billions is meaningless because there is no ceiling at which debts levels are considered dangerous. This information is meaningless.

Stating the debt as percentage of GDP is even more disingenuous. To begin with, the GDP is a flawed measurement (see GDP Keynessians Vodoo Economics). Secondly, by expressing it as a percentage, it actually psychologically minimizes the impact of large numbers. At the same time, we still don't have a standardized level that would indicate danger. But the biggest scandal, is that in the surface it would seem OK to do this; to express the debt as a percentage of income. The problem is that this trick is a scam. The GDP does not belong to the government. It is not government income. It is the total manufacturing capacity of the country. It is like expressing your debt as a percentage of your entire neighborhood gross income. Do you think that this calculation is OK? And lastly, gross income does not take into consideration expenses; this would be the net income, which are the types of calculations they never do… how convenient.

It is as if a company would state their debt as a percentage of total sales, not profits. Since profits = sales - expenses, we have no clue if the debt is actually large or small when expressed in such a manner. However, in the case of governments, that is precisely what they do.

In the same manner, when they express expenditures as a percentage of GDP, they are being disingenuous, if not outright fraudulent. Again, it makes no sense to express your expenses as the gross percentage of you neighborhood's income. In the same manner as your neighbor's income is no yours, the GDP is not a government's income… much that politicians look at it that way.

And finally, we have unemployment. Never mind that there is a lot of data "massaging" going on at any government level, it's the fact that even with the data… errr… "adapting" it is still ridiculously high. An unemployment rate in the order of 10% is considered an economic catastrophe. In Greece we have something in the order of 25%, but this does not include all kinds of people that conveniently and mysteriously fall between the cracks of statistical analysis. Who knows what the real unemployment rate may be, but one thing is sure, it is much, much higher than 25%.

Now, we have dealt up to this point only with government debt and government numbers. However, there is yet another aspect to this situation, and this aspect is the private debt, which is monstrous enough. It is estimated to be of at least another 300+ billion EUR as a minimum. In theory, this debt is private and the Greek government has no stake in it. But is this true? In a word, no. This so-called "private" debt is in the hands of Greek bankers. If Greek banks go under, Greece goes under. Result? At the slight insinuation of troubles, this debt will be nationalized, hence probably more than double the current Greek government debt.

Now, returning to our question, would you buy Greek bonds?

Any rational person would not only not buy, but run away. How is then possible that seemingly seasoned and intelligent banker rushed to purchase Greek worthless paper?

In a word?

All of the above economic analysis are for rational people. But bankers, at the highest level, are political players. They know that there is far more money to be had from government sources than from any market source. So they gauge the Greek problem from a different perspective. The question they need to answer is as follows: will the Greek government go belly-up before they receive their bond profits?

And to answer this question, they refer to the first rule of investing into a Ponzi scheme: get in early and get out early. This is precisely what they are doing. They have plenty of cash sitting in their banks with nowhere to go due to the ZIRP policy and the flat economic activity. So, almost 5% ROI over 5 years is not bad. More considering than the European powers that be (i.e. politicians) consider Greece too big to fall. Greece had already had two bailout packages and there are talks of a third one. This will stretch Greece survival for another 5 years, or at least this is what bankers believe. Therefore, the correct answer to the original question is yes, as a banker you should invest in Greece, provided you go out as soon as you get paid.

And so, the two points of view we started with are both right and are both wrong. It is nuts, it is a Ponzi scheme but it is also a matter of timing. Of course, eventually, Greece will blow-up. This much is inevitable, the problem is that Greek and EU "authorities" can extend this "eventually" time period for an awful amount of miserable time (miserable for Greek citizens, this is).

Eventually, something truly awful will happen and Greece will go into default probably taking with it a few other EU countries that cannot "hack it" while tied to the Euro. When this time comes, people will ask themselves, how is it possible? We? We would be asking, how come you didn't see it coming when it was so darn obvious?

And so old government tricks and scams are alive and well in Greece. This is not a surprise at all. As a matter of fact, these are so obvious that we even considered not to write this piece, but then we changed our opinion because it is part of our job to keep reminding people why we are Absolute Austro-Libertarians and why governments are working against your wellbeing (financial and otherwise).

It is your turn now; believe the data or not. It may be their data, but it is your decision.

Note: please see the Glossary if you are unfamiliar with certain words.


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