Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 121

Greece: Scylla and Charybdis

In Greek mythology, Scylla was a seven-headed monster that lived on one side of the Straits of Messina, a narrow strip of water separating the island of Sicily from the Italian mainland. On the other side lay Charybdis, a deadly whirlpool that led to many a watery graveyard for passing ships.

JH Photo1 070815

JH Photo1 070815

In Homer’s Odyssey, Circe advises Odysseus to sail closer to Scylla,

“A large fig tree in full leaf grows upon it, and under it lies the sucking whirlpool of Charybdis. Three times in the day does she vomit forth her waters, and three times she sucks them down again; see that you be not there when she is sucking, for if you are, Neptune himself could not save you; you must hug the Scylla side and drive ship by as fast as you can, for you had better lose six men than your whole crew.”

Modern Greece faces its own dilemma; should it too sail within reach of Scylla, the 28-headed monster that lives in Brussels to avoid Charybdis, the ‘sucking whirlpool’ that is the return of the drachma?

Golden Rule No. 1 in Stanford Brown’s 10 Golden Rules of Investment is Mark Twain’s prophetic comment that “history doesn’t repeat itself, but it does rhyme”. Greece isn’t technically in default but the probability of it being able to repay its 340 billion euro debt load is zero. This is actually not an unusual situation for Greece as it has been in default for 48 of the past 210 years.

JH Figure2 070815The Greek Parliament has recently passed a much harsher austerity Budget than was rejected by its own people in a recent referendum. Prime Minister, Mr. Tsipras, elected to end austerity, has bizarrely agreed to a tightening of the austerity noose. Greece, reeling under the weight of its burgeoning debt mountain, has been given an additional 86 billion euros in debt. The IMF has said it won’t participate as it believes it has no chance of ever getting repaid. And the Greek people want to stay in the euro, but reject the austerity that membership requires. In this topsy-turvy world of contradictions, catch-22s and nonsense, the Mad Hatter could not have put it any better,

“If I had a world of my own, everything would be nonsense. Nothing would be what it is, because everything would be what it isn't. And contrariwise, what is, it wouldn't be. And what it wouldn't be, it would. You see?”

Pour encourager les autres

David Zervos, chief strategist at research house, Jeffries, never doubted the outcome,

“The Greeks now stand as poster children for European profligacy. And they are being paraded through every town in the EU, in shackles, as the bell tolls near the gallows for their leader… The Portuguese, the Italians, and Spanish are surely taking notice… With no real way to ensure fiscal discipline through the treaty, they resorted to killing one of their own in order to keep the masses in line.”

There has always been widespread support in Europe for the Union, but the single currency has never been popular. The euro was the price demanded by France for the re-unification of Germany in 1990; such was their fear of a strong neighbour to the east. The French believed that binding Germany into the corset of monetary union would curb her power. What a colossal mistake.

Whilst tragic for Greece, the fallout for investors across the globe is not going to resemble a ‘Lehman moment’ – even in the worst case of a messy Greek exit from the single currency. There are four key reasons for our complacency. First, Greece is very small, accounting for just 0.25% of the global economy; the European banking system is now much less exposed to a Greek default, having swapped its Greek debt with the IMF and the Eurozone; the other vulnerable European economies of Portugal, Spain, Italy and Ireland are in much better economic shape than during the last Eurozone sovereign debt crisis in 2011; and finally, Europe has now established robust defence mechanisms with sufficient firepower to handle future crises. These include a bailout fund called the European Stability Mechanism (despite being expressly banned by the Maastricht Treaty), cheap funding for banks from the European Central Bank, and the ECB’s mammoth Quantitative Easing program, which has so far contained any rise in bond yields of the peripheral countries (see chart below).

JH Figure3 070815The disastrous experiment that was the European Single Currency will serve as a classic case study for generations of future Business School graduates. The lesson learnt is that economics always trumps politics, no matter how hard you wish it wasn’t so. If only we had all listened to the great economist, Milton Friedman, who in 1997, two years prior to the establishment of the single currency, had this to say,

“The drive for the Euro has been motivated by politics not economics. The aim has been to link Germany and France so closely as to make a future European war impossible, and to set the stage for afederal United States of Europe. I believe that adoption of the Euro would have the opposite effect. It would exacerbate political tensions by converting divergent shocks that could have been readily accommodated by exchange rate changes into divisive political issues. Political unity can pave the way for monetary unity. Monetary unity imposed under unfavorable conditions will prove a barrier to the achievement of political unity.”

The image at the start of this article depicts Greece sailing within reach of Scylla (the euro), to avoid Charybdis, the ‘sucking whirlpool’ that is Grexit. But have we mixed our monsters? Returning to the drachma would give Greek businesses an immediate competitive boost, albeit with much associated turmoil, and buy the country precious time to make necessary reforms. Perhaps Grexit is the modern-day Scylla, resulting in the loss of six years, whilst the whirlpool of Charybdis represents the continued membership of the European single currency and a lost generation. In this case, it’s better the devil you don’t know.

 

Jonathan Hoyle is Chief Executive Officer at Stanford Brown. Any advice contained in this article is general advice only and does not take into consideration the reader’s personal circumstances.

RELATED ARTICLES

Germany will do the minimum to support the euro ... and Europe

Coronavirus and the fragilities of Italy and the eurozone

Will sovereign defaults spark the next GFC?

banner

Most viewed in recent weeks

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

Three all-time best tables for every adviser and investor

It's a remarkable statistic. In any year since 1875, if you had invested in the Australian stock index, turned away and come back eight years later, your average return would be 120% with no negative periods.

The looming excess of housing and why prices will fall

Never stand between Australian households and an uncapped government programme with $3 billion in ‘free money’ to build or renovate their homes. But excess supply is coming with an absence of net migration.

Five stocks that have worked well in our portfolios

Picking macro trends is difficult. What may seem logical and compelling one minute may completely change a few months later. There are better rewards from focussing on identifying the best companies at good prices.

Let's make this clear again ... franking credits are fair

Critics of franking credits are missing the main point. The taxable income of shareholders/taxpayers must also include the company tax previously paid to the ATO before the dividend was distributed. It is fair.

Welcome to Firstlinks Edition 424 with weekend update

Wet streets cause rain. The Gell-Mann Amnesia Effect is a name created by writer Michael Crichton after he realised that everything he read or heard in the media was wrong when he had direct personal knowledge or expertise on the subject. He surmised that everything else is probably wrong as well, and financial markets are no exception.

  • 9 September 2021

Latest Updates

Investment strategies

Joe Hockey on the big investment influences on Australia

Former Treasurer Joe Hockey became Australia's Ambassador to the US and he now runs an office in Washington, giving him a unique perspective on geopolitical issues. They have never been so important for investors.

Investment strategies

The tipping point for investing in decarbonisation

Throughout time, transformative technology has changed the course of human history, but it is easy to be lulled into believing new technology will also transform investment returns. Where's the tipping point?

Exchange traded products

The options to gain equity exposure with less risk

Equity investing pays off over long terms but comes with risks in the short term that many people cannot tolerate, especially retirees preserving capital. There are ways to invest in stocks with little downside.

Exchange traded products

8 ways LIC bonus options can benefit investors

Bonus options issued by Listed Investment Companies (LICs) deliver many advantages but there is a potential dilutionary impact if options are exercised well below the share price. This must be factored in.

Retirement

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

Investment strategies

Three demographic themes shaping investments for the future

Focussing on companies that will benefit from slow moving, long duration and highly predictable demographic trends can help investors predict future opportunities. Three main themes stand out.

Fixed interest

It's not high return/risk equities versus low return/risk bonds

High-yield bonds carry more risk than investment grade but they offer higher income returns. An allocation to high-yield bonds in a portfolio - alongside equities and other bonds – is worth considering.

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.