Greece Borrows from Prof. Shiller

A little known element of the Greek bond restructuring of several months back was the granting of warrants whose coupons were linked to Greece’s GDP. Maybe this was inspired by Professor Shiller’s suggestion (most recently in his book, “Finance and the Good Society”) in which he proposed that the U.S. issue “Trills”, securities whose coupons would pay one trillionth of GDP annually. Such an approach is pro-cyclical, in that it links a government’s cost of financing to economic growth. While there’s no chance of the U.S. adopting anything so radical, the problem facing southern European Euro members is that slow GDP growth impedes their ability to finance their existing debt, perversely driving up its cost as the risk of default overwhelms the subdued inflation expectations that would normally drive rates down.

The Greek warrants were an attempt to share some of that risk with their creditors, and as noted in the FT today these originally unloved instruments have performed quite well of late.

It illustrates the many unconventional tools and limitless ingenuity of the Europeans to maintain the Euro and keep the European project alive.

We have been invested in gold miners through GDX for some time. Gold has been a mediocre performer but a form of quantitative easing is looking increasingly likely in Europe. The London Daily Telegraph today also believes that Germany will endorse “capping” the spreads between the bonds of weaker Euro members and Germany. If implemented, this really would represent the a blank check for the ECB to finance Italy and Spain and thus prevent high borrowing costs from offsetting their budget discipline. While controversial in Germany, it makes financial assets (such as bonds) marginally less attractive and we think improves the case for investments in real assets including gold. We are invested in GDX in our Deep Value Equity Strategy.

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