Greek bond yields and CDS are surging again today as budget shortfalls put a cloud over Greece’s future. The math here was predictable. You weren’t going to put a meaningful dent in their budget by cutting spending and effectively torpedoing your revenues. We have seen the same thing in Ireland. Finance Minister George Papaconstantinou finally appears to be coming around the realization that austerity might not be working:
Greek bonds slid for a third day as Finance Minister George Papaconstantinou said a tax-revenue shortfall is hampering government efforts to reduce the nation’s budget deficit.
“We are pretending collectively as a country to have a tax system,” Papaconstantinou said. “We don’t.”
“If we stop now and don’t continue with major changes, the sacrifices we have made so far will be lost. Instead of making the crisis an opportunity, we will probably find ourselves in a worse situation.”
This problem is long from over in Europe. Unfortunately for the citizens of Greece they are entwined in a flawed currency system that has ceded their monetary sovereignty to what is effectively a foreign central bank. Trichet holds the cards for the Greeks and that really means the Bundesbank holds the cards for the Greeks. The Germans will continue to impose policy that benefits them and hurts the periphery. It’s difficult to imagine that this problem won’t one day force major overhauls on the Euro currency system. For now, they’re simply holding out hope that a sustained global recovery will pull them out of this crisis. Unfortunately, the way this is all being dragged out likely means it will take something far worse than the current environment for the Europeans to wake up to the plight that has been imposed on them by foreign bankers.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.