One of my friends has been debating with me the fear of contagion in the eurozone. Quite frankly, any country with a debt to GDP threshold above 90% has faint hope of recovering without some damage inflicted on the public or holders of its bonds.
Furthermore, from Professor David Beim of Columbia University:
European leadership needs to organize an orderly debt restructuring immediately, but is afraid that if it does so, Portugal will be next in line and others will not be far behind. The best way to control this contagion is to require that any country granted a debt restructuring must leave the euro.
To be honest, wouldn't the contagion be warranted because of irresponsibility in those other countries? So are we saying that politicians want to avoid the consequences of their bad actions, that they want all the upside and none of the downside? How typical, to be honest.
Perhaps we should differentiate first between deserved and undeserved medical contagion. Undeserved would be smallpox or the Black Plague before vaccines were invented and people did not understand hygiene. Deserved would be the numpties who refuse to give their children their MMR vaccines - if we have a resurgence of diseases like polio or measles, mumps or rubella thanks to idiotic parents, while I sympathize with the kids who suffer for their parents' idiocy, the parents' suffering will be well deserved.
So, coming back to the financial market, we should ask if there is undeserved financial contagion? Absolutely. Autumn of 2008 and March 2009 were rife with solid companies trading at dirt cheap prices thanks to fear. This is when people who follow Buffett's maxim to "be greedy when others are fearful" make their money.
However, with each of these countries, their debt situation is such that we have to be skeptical about their ability to make investors whole and keep their countries sound, especially considering that sovereign default is a lot more common than people think: according to Reinhart and Rogoff, between 1800 and 2000, eleven European countries had 67 instances of default, with Greece being in default for 50% of time since independence in 1829. Hence, I would place them in the "deserved financial contagion" category. Hence, why I told my friend to bring on the contagion.
Any investor stupid enough to lend money to these governments deserves the mark-to-market pain, haircuts and possible default. Any member of public willing to buy into the irresponsibility of their politicians deserves their comeuppance, harsh as that sounds. Because last I checked, action without consequence breeds terrible decisions. Profits without losses born by the risk-takers results in terrible capital allocation. If there is one thing I am sad about, it is that the politicians will not receive the blame they should.
If I appear more cynical, it is because I am re-reading A Song of Ice and Fire, in which government is nothing but a set of thugs and no one in power even cares about the collateral damage on the peasantry in their wars. If there is one thing to be said for today's politicians, they pretend to care.
N.B. Please either kick Ireland, Portugal, Spain, Greece, Italy, France and any other relatively irresponsible government out of the eurozone, or let the responsible governments (Germany and Austria) get out and leave the rest to their shenanigans. A common currency is not essential for free flow of capital.
Also, per this chart, if the drachma came back, I would be very excited about a holiday in Greece. Letting them resume their persistent devaluation would be awesome for me as a tourist, though I still would feel sorry for the Greek citizens who allowed it to happen.
Who knows, maybe a vacation home in Greece could be come cheap thanks to government irresponsibility, if it triggers a serious bout of inflation. Though Greek is low on my list of languages to learn. I should probably consider Argentina first.