End of an Era of Pretending and Extending?

Is this the end of an era of pretending and extending?

You can't solve a liquidity crisis with more debt and the markets should be allowed to play out for lenders. If you were to apply the classic rule of the free market, it is very clear what should happen to those who ignore risk management; they go out of business.

Think of it this way, if someone were to offer a borrower a billion dollars, knowing that they are insolvent and already struggling to keep up with the existing interest payment, then who is the fool?

Lending to Greece was a losing game and getting excited about Greek bonds paying 6 percent interest was ignoring the risk-reward maxim of investing. I remember a year ago investors were getting excited about Greece returning to the bond market and paying 6 percent yields, while mainstream was peddling the Greek recovery story. But how could any investor think that lending to a bankrupt nation that pays six percent yield is a good return and good investing. When a business makes a poor commercial decision it suffers the consequences. Likewise, these lenders, consisting of the European Central Bank (ECB) and the International Monetary Fund (IMF), known as the Troika, played the game of extend and pretend. But when the illusion wears off, the reality sets in that lending to a bankrupt state just delays the inevitable credit default some time down the line. So Troika made a professional misjudgement lending to Greece. Maybe a more cynical view might be that lending to Greece was a deliberate ploy to drown it in debt, strip the nation of its assets, then launch a fire sale. The result being that a few obtain trophy assets at bargain prices, thereby making spectacular profits at the expense of the many. Well if that is the case, perhaps the last laugh is then on Greece.

But could the Greek crisis mark the beginning of the end of reckless lending or piranha type of capitalism, which is against the spirit of competition and free markets? The political tide may be changing.

French officials said two weeks ago they would support the new Greek government’s efforts to get the country's economy back to life again after five years of choking on austerity. However, the French argued against any write-down of Greece's debt and insist that Athens should continue with a program of economic structural reforms, which is believed to be the only way of getting the Greek economy back to prosperity.

“France is more than prepared to support Greece,” Michel Sapin, the French finance minister, said during a news conference after a two-day visit by Yanis Varoufakis, his new Greek counterpart. “Greece needs time to put things to work,” he said. But he added, there was “no question” of forgiving Greek debt.

The US is also taking a softer stance on Greek austerity. President Barack Obama suggested the loosening of austerity programs, "You cannot keep on squeezing countries that are in the midst of depression,"

Indeed, Greece is in a desperate state. Its economy contracting by 25 percent and has mass unemployment above Great Depression levels experienced in 1929 and needs emergency funds just to keep the lights burning. Greek Finance Minsiter Yanis Varoufakis said that although Athens was “desperate” for money, it would not seek a 7 billion euro installment on its 240 billion euro international bailout package because it would be required to carry out more bailout terms.

“We have resembled drug addicts craving the next dose. What this government is all about is ending the addiction”, Mr. Varoufakis said, adding it was time to go “cold turkey”.

But could other debt junky European Union member look at Greece and decide that they too need to end the intoxication of debt and pretense and go cold turkey too?

In Spain, Madrid, at least 100,000 according to police estimates (organisers estimated the amount of people was 300,000 people) poured into the streets on the previous Saturday, in a huge show of support for Spain’s new anti-austerity party Podemos. They are riding a wave of popularity after the election success of its Greek hard-left ally Syriza. Supporters carried signs reading “The change is now” as they made their way from Madrid city hall to the central Puerta del Sol square in the first major march called by Podemos.

The Podemos party is another anti-establishment non mainstream political party, which has leapt ahead in recent political polls.

“The wind of change is starting to blow in Europe”, Podemos leader Pablo Iglesias, a pony-tailed former university professor, said in Greek and Spanish as he addressed supporters at the so-called “March for Change”. “We dream but we take our dream seriously. More has been done in Greece in six days than many governments did in years”, the 36-year-old said.

Many in the crowd also waved Greek flags and the red and white flags of Syriza.

The extend and pretend game is going to end up with anti-establishment parties in power.

These parties and the Troika will make an odd bunch when it comes to negotiating debt. Are we on the precipice of a bond collapse?

We live in challenging and extraordinary times.