The Fiscal Cliffs of Santorini

 | Dec 05, 2012 | 9:00 AM EST
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The fiscal cliff is doing the job that the election, August vacations, and various other events also performed: It's taking our minds off Europe. In the standoff between Greece and the Troika (European Commission (EC), the International Monetary Fund (IMF) and the European Central Bank (ECB)), the Troika once again blinked, allowing Greece to slow down the implementation of the next wave of austerity measures. It is all tedious and predictable, because any "solution" that gets that country's debt down to 120% of GDP in 10 years -- when anything above 100% is basically unsustainable -- indicates that the authorities have no answer. They are simply going to let things fly apart of their own accord.

The only question is when the last emergency infusion will be made, after which Greece will default and revert to the drachma. The recently announced buyback was progress for the country. However, it only reinforces the inevitability of default, since there is no effective difference between default and buying back debt for $0.40 on the euro. If you define default as "bondholders take a loss," it is happening now.

As I noted a couple weeks ago, once the majority of defaults occur, I am planning on being unabashedly bullish on Greece. The country will be down and out, which is exactly when there will be nowhere to go but up. Massive losses for Greek bondholders will clear the decks for a revival of growth that will make it the next exciting emerging growth country. But this won't happen until 2014 -- at the earliest. Meanwhile, the Greek default is likely to cause a chain reaction that will rattle the financial system in Europe, causing market declines, a certain recession in Europe in 2013, and a serious headwind in the U.S., even if everything else turns right. Position your portfolio for this eventuality. If nothing else, some gold can be protective.

The biggest irony is that the European Monetary Union (EMU) was a major part of an important package of unifying constructs that were meant to ensure that war, fascism, and genocide never again visited the continent. Instead, the EMU could become the proximate cause of a resurgent fascism that will be harrowingly similar to National Socialism. Latent hatreds can remain latent when economic conditions are not oppressive, but when distress becomes normal, demagoguery often leads to far worse. This BBC report on Greece's Golden Dawn party should concern anyone who has studied the events that led to World War II.

There is no avoiding the pain that will result from forcing Greece to become self-supporting. However, dragging it out for years seems more dangerous than taking a huge hit early, then start recovering quickly. Iceland is still the case study for how the PIIGS (Portugal, Italy, Ireland, Greece and Spain) should manage their debt problems.

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