If Greek sovereign debt collapses nobody will be collecting souvenirs from a fall that could be bigger than the Berlin Wall…

MICHAEL ETTERSHANK

According to Chris Hart from Investment Solutions the biggest event in Europe since the fall of the Berlin Wall is going to be the dismantling of the welfare state with the collapse of Greek sovereign debt.

“European governments have made promises beyond what the wealth of their taxpayers can deliver,” said Mr Hart in an interview on Summit TV. “The people are now asking their governments to meet their promises.”

It’s a well documented fact the Greeks invented the word democracy, so perhaps there is an irony that it’s now come home to haunt them.

“The troubles in Greece can in no small part be attributed to the politics of Europe – the problem is that the Greek electorate do not want to participate in austerity measures,” said Mr Hart.

German voters don’t really want to bail out their fellow Europeans based on perceptions of a diluted work ethic to the south.

“In Greece it’s almost a political death wish is you support the austerity measures that are needed,” said Mr Hart, “but if you support the bail-out packages in Germany you’re also dead politically.”

What this means is the external support to keep Greece afloat is falling away, and so is internal support.

According to Mr Hart it’s in the nature of politics that elections are auctions to see “who can dish out the taxpayers’ money better than the next one?” Mr Hart added that voters in a democracy would not be likely to vote for reduced benefits. “Once people are on the public teat you can’t get them off.”

The result of all this democracy was that where sovereign debt was once set at risk free rates, government debt was now starting to look like the epicentre of risk. Mr Hart said the next big thing was going to be where to find a safe asset?

Mr Hart said that the current negotiations were only likely to “kick the can further down the road” but that Armageddon could be just around the corner: “Why is this Armageddon? It’s not just debt that the Greek government has borrowed from the Greek population – the German, French and Italian banks all own this debt,” said Mr Hart.

He said that US banks don’t own a lot of the European debt, but credit default swaps have been issued by the Americans. “They’re also at risk because of the potential fallout from a Greek default,” said Mr Hart, adding that this was not like a Pakistan default where the debt might be owed to the Pakistani people by their own government.

Mr Hart also warned the problems were not just limited to Greece and Europe: “The US is following the same path with US Federal Reserve and Congress spending out of control – they are also heading for a day of reckoning”.

“It’s like a pleasure boat at the top of Vic Falls – you’re not too close but you don’t notice you’re drifting. Then down you go. It’s very sudden.”

Asked about the potential effect of these global financial woes on South Africa Mr Hart said it was a question of better yield.

“We know the US will have zero yield for a long time to come like Japan,” said Mr Hart, adding that he suspected investment would still come in unless China started to slow down and the commodities story reversed which would be a risk to the rand, along with higher inflation and interest rates that would detract from growth.

Political brinkmanship would also be a feature of South Africa until the ANC electoral conference: “If there is any indication in 2012 that there is going to be mine and bank nationalisation and land grabs we would be setting ourselves up for having a generation long recession.”

Article via Business Day – click here for original article