Richard Koo: "Greece Was A Subprime Borrower"

The Nomura strategist shares his latest insights into Greece and the European contagion. As widely reported, the Western media blames the subprime crisis on “the bankers” for lending to American home buyers who lied on their loan applications and who clearly could not afford their interest payments. It is somewhat ironic that the same popular outrage (at least in core Europe) is now directed entirely at Greece for taking on debts it could not repay, while the bankers who lent the money remain without blame. Perhaps the media thinks the Greek government should have known better, while the average subprime borrower was too simple-minded to be culpable? Koo is happy to lay the blame with the bankers, in both instances, for not doing adequate due diligence. In the case of Greece, the economy’s structural problems were well-known, and he points out that both the subprime and Greek crises were the result of banks/investors chasing high yields and ignoring the inherent high risks. Koo thinks the Maastricht Treaty’s 3% ceiling on fiscal deficits is extremely problematic, as it does not allow for necessary fiscal stimulus when nations find themselves in a balance sheet recession. It is also unenforceable (as we have just seen); plus levying fines on Greece for its violations makes little sense at this point given that it has no money.

So what are Greece's optiona according to Koo?

1. It can leave the Eurozone, but Koo thinks people would cling to their strong Euros and reject the reimplementation of the Drachma...
2. It can announce an end to government bond sales to foreigners (in the private sector)—Koo thinks that putting the onus on the Greek populace to buy its own bonds would reassure the nation’s creditors in the short term, and would make it politically easier for the government to reduce fiscal outlays. “If you want more Greek government cheese then go buy some more Greek government bonds...”

Koo suggests that governments that elect to discontinue foreign bond sales should be exempt from the 3% rule, and this would in turn restore Greece’s fiscal flexibility during the downturn.

An interesting, if unfortunately, entirely unfeasible option, as Goldman would never back it.

Full note below:

h/t JG