All eyes are on Greece these days, with hopes that the situation there can soon be resolved and global recovery kicked into high gear.
Sadly, those hopes are misguided claims Ben Davies, CEO of Hinde Capital. In fact, he says, Greece’s pain foreshadows the future awaiting the rest of the world.
It all comes down to simple math. Greece has increased its debts at a rate far faster than its income has grown. At some point, the debt became so large that the country could no longer service it.
What makes the rest of the PIIGS immune from a similar fate? Or Japan? Or the US? Or the OECD, in general?
Yes, Greece had a smaller, shakier economy and doesn’t have a central bank to print its own currency at will like Japan or the US. But even those countries with a printing press learn that after a certain point, expanding the money supply only complicates the problem of too much debt by inflating key economic input costs and dangerously weakening the currency.
The cold hard fact Greece is facing is that it’s now at the point where extraordinary losses need to be taken. The problem is, no one wants to take them. And all the sturm und drang being exhibited by Brussels, the ECB, sovereign debt holders, and other world leaders is nothing more than a frantic game of hot potato.
The one thing we can be confident of is that at some point, these losses will be taken. The market will eventually force it.
And the second thing we can predict is that we don’t know what will happen when they are taken. There is so much complexity in the counterparty exposure to Greece debt — as well as the much larger derivative exposure tied to this debt — that anything between “not much” and “worldwide financial conflagration” could be possible.
And that’s just Greece. As other larger countries begin to sink under the weight of their sovereign debts, the risks to the global financial system increasingly escalates. Which is why Ben Davies has a hard time finding a good home for investment capital other than gold.
Click the play button below to listen to Chris’ interview with Ben Davies (runtime 56m:40s):
Ben Davies ran trading for RBS Greenwich Capital in London, where he managed a macro portfolio. He started his career in 1995 trading in the credit fixed-income market at Credit Lyonnais, moving to IBJI as a fixed-income specialist, and finally Greenwich Capital in 1999. He graduated with a BSc from Loughborough University, where he majored in accounting and economics. Ben Davies and Mark Mahaffey, former colleagues from RBS Greenwich Capital, established Hinde Capital in early 2007, where they primarily focus on the precious metals and commodity sector.
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