Marc Faber: the Euro, Greece, and sovereign defaults

Marc Faber, Editor and Publisher of “The Gloom, Boom & Doom Report’” talks about the future of the Eurozone and sovereign defaults.

When the German finance minister recently proposed a temporary Greek exit from the Euro it was perceived as a breach of what was long held as the sanctity of Monetary Union. For the first time a leading European politician departed from the line “to save the Euro no matter what”. Could this have been a watershed moment? What do you think, five or ten years from now, will there still be a euro, will it still be in the same composition or will it simply fall apart?

Nobody knows that. We don’t know how the world will look in five or ten years´ time but I would say that I believe the euro will survive. Now the question is, in what form? Maybe there will be a euro like a US dollar, we have a US dollar, and maybe some countries like Greece, Italy, Portugal, Spain will no longer use the euro and will have essentially gone back to their local currencies. It could be, maybe not. Because you understand, the typical Italian, Spaniard and Greek, he knows very well: we leave the EU, our pensions will be paid in local currency and that will be much less than what we get now.

So on the one hand, from a nationalistic point of view, most Europeans would like to leave the EU but when they look at their pocket book, it is like when Scotland, when the vote came up to exit Britain, Great Britain, the young people, most of them voted for the exit, but the elderly people, the pensioners, they were threatened, again because as you say the media said well you leave the EU, your pensions will be cut… so if you are an elderly pensioner, what do you prefer, to get your pension and be part of the UK or leave the UK and get lower payments?

This is one reason I think the EU may stay together but of course if the economic conditions in the southern countries, Greece, Italy, Spain… do not improve, if they actually worsen again then maybe the move towards leaving the EU will become very strong. Number two, I have been writing about this, you know if you look at history, we had great empires, the Greek empire and the Roman empire and the Ottomans and the Spanish empire and the British empire and now we have the supremacy of America that I probably waning but it was certainly there after the Second World War, the point is usually if you had empires in the past, it was very costly because you had to keep armies in the so called colonies in your territories, and if there were problems you would have to send in the troops and the ships and so forth to essentially enforce your empire.

In the modern empires, like the EU, you may have to pay. It is not sending armies to Greece but basically you have to pay so that Greece stays in the empire and then comes the questions the Germans ask, how long are they going to be willing to pay for it? Because it comes out of tax payers´ money, you understand, the politicians, they don’t pay it. Most politicians don’t even pay taxes because they are with the EU in Brussels or with the IMF or the OECD, all these clowns they don’t pay tax and then they go and propose wealth taxes on the others, on us, who work. They don’t work, they don’t pay tax but the others should pay tax.

Basically the tax payer in Germany one day he will say well we don’t like the policies of Mrs Merkel and this is happening in America, they don’t particularly like Donald Trump but they like the fact that he points the finger at all these others that have abused the system so badly. My sense is that we could have not necessarily revolutions in the sense that you have armies fighting against each other in Germany and France like in the French revolution and so forth but what we could have is through the democratic process people saying we are just fed up with these bureaucrats in Brussels and the ones in Berlin and the policies that always lean on America. We are sovereign nations; we want to be free, even if it costs us something.

We in Switzerland, we are not part of the EU but de facto, through the back door, Switzerland has essentially become an EU member.

Via regulations…

Yes. Absolutely. The Swiss fought for independence for the last 800 years and now suddenly they accept everything! They have no fighting spirit anymore!

But let´s assume some countries are ready to leave the euro zone. In the case of Greece this would go along with a major haircut or an outright default…

Yes, but a haircut and the default will occur regardless. I mean, even the IMF accepts the fact that the Greek debt has to be reduced somewhat. What they have done lately is the EU lends money to Greece and Greece then can pay the ECB and the IMF. It is a complete joke! It is a complete joke! It is like if you borrowed money from me, a thousand dollars, after one year you say, Marc look I can´t repay you and I can´t pay the interest, but if you lend me another thousand, then I can pay you the interest on the first thousand. But then you owe me two thousand!

And after the third year you come back and say Marc I´m very sorry, I can´t pay you the two thousand maybe you will lend me another thousand so I can at least pay you the interest on the two thousand! And so the game goes on. When you look at Greece objectively, private investors would never have lent all together 300 billion dollars to Greece, never! But governments are the peoples´ money you understand?

The ECB and the ESM and so forth are other peoples´ money, they don’t care.

When you say the defaults will come anyway, it would have huge implications, after all over the last 40-50 years it was inconceivable that a Western country would actually go bankrupt.

Well actually Greece has defaulted before and repeatedly.

Greece is relatively small compared to, let’s say, Italy. For a country like that to go bankrupt it would have huge consequences…

Yes sure, I agree with you that’s why we were discussing before that the debt liquidation hasn’t occurred yet. I mean I am less concerned about say Spain, Italy, France, and Greece defaulting than a big one defaulting. You understand? The US is not in a very good position either, if you look at their unfunded liabilities.

In America many cities are basically bankrupt as well as some states or semi states like Puerto Rico. Then, have a look at Japan, the Japanese situation is very serious in the long run because if interest rates, they are now on 10 years JGBs 0.03% but already at these very very low rates, Japan pays, I think close to 45% of tax revenues go to payment of interest on the debt. Now if the interest rates went up on JGBs to say 1%, all the tax revenues would have to be used to pay the interest on the debt!

In my view, Japan has no other option but to print money or default and that will then imply that the Yen will then become weaker and so forth.

In my view, Japan has no other option but to print money or default and that will then imply that the Yen will then become weaker and so forth. I mean the whole system in the world is in a complete mess.

But so far the central banks and the authorities were able to paint fresh paint on the cracks and so they are not that visible. And don’t forget; who actually has something to say in economics? Most of the people are university professors but they are somewhat linked to the Federal Reserve or to another central bank through consultancy arrangements and so forth.

Basically they are bribed to support the system. Number two, the financial system consists of money managers, hedge funds, the large long bonds, long equities funds like Fidelity and PIMCO and so on, all these guys are interested in money printing because it lifts the asset values and with rising asset values the fees go up and the performance fees go up so nobody has interest actually in an honest economic policy, they all are in favour of Bernanke´s bailout of problems that occurred in 2008.

Interview conducted by Johannes Maierhofer and Peter Matay

Full Interview – The big picture with Marc Faber