Greece the Economic Wasteland

Never bark at the Big Dog. The Big Dog is always right. Over the past year I have explained repeatedly that Europe is in a permanent crisis, that the continent is turning into an economic wasteland and that the best way to define this new economic condition is “industrial poverty”. Today we get a hands-on reminder that I have been right all along. From Greek Reporter:

S&P Dow Jones Indices, said that Greece no longer classifies as a developed market. The general consensus among participants is that emerging market status is a more appropriate classification due to the following reasons: The Greek equity market lags behind the advancements in market practices typical of other developed markets. Dramatic and consistent reduction in market size over the past few years. Failed minimum credit ratings criteria: Greece is currently rated as B-; minimum is BB+ Failed market accessibility criteria: Restrictive securities borrowing and lending facilities. Lack of ease in transferability – market participants pointed out the difficulties in dealing with in-kind transfer and with off-exchange transaction-like facilities that make trading in the local market extremely challenging and impractical.

In short: from the viewpoint of the financial industry, Greece is no longer a first-world, industrial economy. But Standard and Poor were not the first ones to downgrade Greece. Back in June, reported:

Greece became the first developed nation to be cut to emerging-market status by MSCI Inc. (MSCI) after the local stock index plunged 83 percent since 2007. Greece failed to meet criteria regarding securities borrowing and lending facilities, short selling and transferability, said MSCI, whose equity indexes are tracked by investors with about $7 trillion in assets.

This is going to have serious long-term consequences for the Greek economy. The financial industry is the engine oil that keeps modern economies going. It is entirely possible that this will lead to a withdrawal of some levels of service from financial corporations. As a result there will be less foreign direct investment activity and a continued drainage of liquidity from the Greek financial system.

Lack of liquidity is a serious problem in a modern economy. One of the most important institutions in our industrialized world is the property right. The tradability of property rights constitutes the foundation of our modern monetary system: when we can put our property out on a functioning, continuous market, we can get a continuous evaluation of its value. We can also obtain liquidity without giving up our property rights – it is called collateral, or in the case of a corporation, the stock market. By allowing someone to hold a lien on our property in exchange for cash, we increase the liquidity level in both the business sector and in private households. This in turn allows a lot more flexibility in how we invest, save, consume and produce.

The key to maintaining a modern monetary economy with a high liquidity level is that there are always buyers and sellers ready to enter markets, such as the real estate market or the stock market. When few people want to buy and sell on the market, it becomes illiquid. An illiquid market becomes a high-risk market: lenders and investors are less certain they can get cash when they need to. Higher risk means higher credit costs, i.e., higher interest rates.

With a less-properly functioning credit market it becomes difficult for people to start businesses as well as for foreign businesses to invest in the country. This can quickly cause a long-term structural decline in the entire economy. I am not saying that it is over for Greece as an industrialized economy – on the contrary, I maintain that it will indeed remain industrialized – but I am suggesting that if this decline in the country’s financial system continues, its nature as an industrialized country will change dramatically. The Greek economy will freeze at a relatively primitive level, that it will remain there and that it will not see any notable growth in the foreseeable future.

Back to

MSCI put Greece under review for downgrade in June 2012, saying restrictions on in-kind transfers, off-exchange transactions, stock lending and short-selling stopped the country from having a fully functional market. The probability of a demotion increased after Coca-Cola HBC AG, the soft-drink bottler that previously made up almost a quarter of the Athens Stock Exchange by weight, switched its primary listing to London in April. … “We’re already seeing money heading back to safe havens and the MSCI decision may exacerbate that,” Peter Sorrentino, who helps manage about $14.7 billion at Huntington Asset Advisors in Cincinnati, said in a phone interview. “Greece’s downgrade brings them back to the forefront and it’s a sign that the crisis in Europe is far from over.”

The trend of downgrading Greece to “emerging market” status actually began already in March. Back then reported that Greece had…

failed one or both of Russell Indexes’ economic and operational risk assessments each year since 2011, according to a note on the company’s website. The relegation will force managers to buy and sell shares to align holdings with their funds’ criteria. “Since the country began revealing unsustainable levels of public debt in 2009, it has been in an unfortunate economic tailspin that at times has threatened to pull apart the entire European Monetary Union,” according to a statement from Mat Lystra, Russell’s senior research analyst. While bailouts by Europe have eased its debt burden, “more than loan repayments will follow the diffusing of the crisis, since any opportunities in the Greek economy have become inherently riskier exposures for global investors,” Russell said. Greece is the first country Russell has cut to emerging from developed market status, according to Michael Gelormino, a spokesman in New York.

It probably won’t be the last. As I have reported on numerous occasions – see, e.g., this one about the debt crisis – the European decline has not stopped. It continues, though more quietly than earlier this year. But it does not matter how much or how little media writes about an economic crisis – macroeconomic facts don’t lie. Europe is becoming an economic wasteland of unseen proportions.

It is sad to watch, but unless we soberly look at what is happening, we will never be able to draw the right conclusions from it. We won’t learn the lesson. If we don’t learn the lesson we won’t be able to save the United States and other countries that still fly the flag of freedom and prosperity.