At some point in the next couple of years, I am going to invest in one of the most promising emerging markets on the planet: Greece.
I can hear the shouts of disbelief already! I emphasize that Greece is not investable now because its debt burden is unsustainable and the country is only starting to implement the reforms necessary to resolve its situation. (I also put the odds at 50% -- at least -- that Greece ultimately leaves the euro.) The reforms being forced upon Greece by the troika, however, will shape it into an economically competitive dynamo in the years ahead.
Let's look at some of the reforms Greece was forced to pass last week in the face of mass rioting.
- Significant spending cuts that reduce the role of government in society.
- Freezing all public sector salaries.
- Increase the "redundancy rate," i.e., how many employees can be laid off by private sector companies.
- Shorten the termination notice period from two years to one-to-four months.
- Reduces the minimum wage.
- Puts work requirements into welfare.
- Reduces pensions.
- Moves public and private retirement age to 65.
Many of the reforms sound like common sense, but it is not surprising that benefits had grown to insane proportions, dragging down the economy. Just moving back to "normal" (by U.S. standards) will unburden the economy meaningfully. No matter what precisely is implemented in the next couple of years, directionally Greece is moving to less government, more flexible labor laws, and returning people to the workforce.
The second half of the investment equation is what will inevitably come, one way or another:
- Tax code reform that encourages the Greek economic elite to honestly declare their incomes and pay taxes. (Did you know that only 200 people declared incomes over €500,000 last year in Greece? This in a country of 11 million!).
- Greece will default on a significant portion of its external debt. The numbers simply don't add up, and there is no other way they can realistically bring the debt down to a manageable level. A wonderful thing happens when a country gets to keep the fruits of its labor, rather than turn them over to someone else: the economy will boom. Look no further than Argentina and Brazil, which regularly ran up debt and turned into economic basket cases -- until default and reform. Next thing you know, Brazil is one of the BRIC (Brazil, Russia, India, and China) emerging-market countries.
I won't spend each day wondering if this is the time to pour money into Greek stocks. Patience is a virtue here. But the more strife in the streets, the more you know the reforms are meaningful and will help the economy in the long run. Like obscenity, you'll know the day to start building your Greece position when you see it. The social unrest will be at its highest, and major events (like an exit from the euro or an announced default) will be in the headlines.
Relax for now, but keep one eye on Greece.