This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Greek Euro Exit? More Pain Than Gain

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( TheStreet) -- In a recent blog post, we argued that, despite her credentials, Christine Lagarde may not be the best choice for heading the International Monetary Fund (IMF). This is because of her bias to protect the French, German and European banks from the losses they will have to take in a Greek default. We also think she will pursue the same "extend and pretend" policies that were put in place a year ago rather than face up to the fact that we are dealing with insolvency, not temporary illiquidity.

The Moral Hazard Expectation

It is clear that Greece will never be able to repay its debt in today's euros, and European banks are clearly in jeopardy. Yet the market has yawned, and European bank equity values have been untouched. A comment received from a colleague regarding that blog post read, in part:
If she Lagarde gets into position and kicks the ball down the road a ways, it will only be to give these big banks a chance to off-load and write-off Greek credit over a few years which will make it more palatable when the time comes to restructure.

The market appears to have much the same attitude expecting the governmental institutions to save the "systemically" important financial institutions. Moral hazard is now the expectation. Not only are all depositors implicitly protected, but so are the shareholders, bondholders and the managements. We always thought that investing was a risk-reward business. Investments that fail are supposed to penalize the investor through a monetary loss. There isn't supposed to be a floor of book or par value supported by public funds.

The Implications of Additional Austerity

We suspect the reason for the kid gloves treatment is that the alternatives inflict too much short-term pain. As mentioned above, a Greek default significantly impacts most large European banks. Rather than recognize the impairment of the investments in Greek debt, in exchange for additional monetary support, the European Central Bank (ECB) and IMF will likely impose even more stringent austerity measures on Greece than the ones that currently exist and cannot be met. What isn't factored in is the impact this will continue to have on the Greek economy and its population.

It was only 10 years ago (2001) that the government of Argentina was compelled by the IMF and other large institutional debt holders to apply more and more austere measures on its economy in order to pay back debt. In December 2001, the austerity imposed was met by protests that quickly erupted into revolution, governmental overthrow, and eventually a tacit default. Is this where we are heading again?

1 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
AAPL $123.25 0.00%
FB $83.30 0.00%
GOOG $548.34 0.00%
TSLA $185.00 0.00%
YHOO $45.10 0.00%


DOW 17,712.66 +34.43 0.19%
S&P 500 2,061.02 +4.87 0.24%
NASDAQ 4,891.2190 +27.8570 0.57%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs