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Marc Faber Warns of Greece Crisis Contagion Very High Risk

Stock-Markets / Eurozone Debt Crisis Jul 06, 2015 - 05:44 PM GMT

By: Bloomberg


Marc Faber, Editor of the Gloom, Boom & Doom Report, spoke with Bloomberg Television's Olivia Sterns and Matt Miller about the contagion risk posed by the Greek debt crisis and the prospects for a resolution. He also discussed the Chinese stock market.

When asked whether we are actually going to see contagion spread further, Faber said: "I think the likelihood of contagion is very high. And I have to say when you have a borrower, you also have a lender. And it's actually, in my view, amazing how the EU kept on pumping money into Greece, partly also to bail out their own banks. And suddenly now the debt is no longer manageable."

On Greece's best option, Faber said: "I think for Greece, actually, probably to exit the EU is the best option, because if they default on everything, then they will be basically debt-free. Now the pain near term will be very substantial because they won't have any cash money or sufficient cash money. There will be a cash shortage. The economy will plunge."

OLIVIA STERNS: Let's bring in one of our favorite guests, Marc Faber. He is the publisher of the "Gloom, Boom and Doom Report," and he joins us now on the phone from Thailand. And, Marc, great to have you here on the Bloomberg market day. Thank you for joining us. I want to start with getting your take on what has happened in Athens in the last 24 hours. We had one guest on earlier this morning who described this as a three-ring circus with no circus leader. What's your take?

MARC FABER.: Well my take is that they will have to compromise. Greece has basically rejected the austerity proposal by the EU. And what we will see is essentially the ECB will either have to attempt to continue to pump money into the Greek banking system, or they will have to stop.

And everybody knows in the world that Greece cannot pay its debt at the current size. So what will happen, in my view, is either Greece will leave the EU and will suffer very badly for a few months, maybe even longer. There will be a cash shortage. Or the EU, and the ECB and the IMF will have to cut a significant haircut. And Tsipras proposed a haircut of something like 30 percent. I don't think that's enough. I think they will need a haircut of at least 50 percent.

MATT MILLER: So do you think -- I mean Thomas Piketty this morning in (INAUDIBLE) was arguing for debt forgiveness, saying that Germany received a lot of debt forgiveness after the Second World War, and he thinks they should extend the same kind of offer to Greece. What do you think about that argument?

FABER: Yes. I agree that they should have a debt forgiveness, but if you forgive debts and you then continue to pump money into Greece and they don't compromise themselves because the government is bloated in Greece, then they won't -- then the problem will resurface in the future. But I would like to focus on something, which is Greece may be the first country to actually oppose the measures imposed on them by the ECB, by the EU and also by the IMF. And more countries may follow.

And for the markets the implications are what we are actually seeing today, or any that the weaker credits in Europe, Portugal, Italy, Spain, their bonds are weakening, whereas the strong credits are strengthening, in particular, U.S. treasuries. And I don't believe that stocks have been weak recently because of Greece. I think they are weak for a number of reasons. I think the global economy is slowing down, particularly the economy that is related to China. And we have gotten many indices that were down, or at least significantly before today.

MILLER: Well --

STERNS: Okay. Well, Marc, well let's get to the Chinese market reaction in just a second, but on this issue of contagion, Matt, I noticed over the weekend on Twitter the head of Podemos, the Spanish anti-austerity party, he put up a new avatar picture of him with Alexis Tsipras. This is exactly what Angela Merkel does not want to see, a sort of a cross-border comradery between the anti-austerity parties. Marc, how likely do you think it is that we are actually going to see contagion spread further?

FABER: I think the likelihood of contagion is very high. And I have to say when you have a borrower, you also have a lender. And it's actually, in my view, amazing how the EU kept on pumping money into Greece, partly also to bail out their own banks. And suddenly now the debt is no longer manageable.

And I would say, wake up people of the world and investors. Greece will come to your neighborhood very soon, maybe not this year, but next year or whenever it is, because the world is over infected. And defaults will follow, or they will have to create very high inflation rates.

MILLER: Well what do you think, Marc, though will happen if Greece is indeed thrown out of the euro? I mean that would mean essentially total debt forgiveness because they would, I guess they would default if that were the case. And then a lot of people argue that markets will start turning against the next weakest member.

FABER: Yes, possibly. I think for Greece, actually, probably to exit the EU is the best option, because if they default on everything, then they will be basically debt-free. Now the pain near term will be very substantial because they won't have any cash money or sufficient cash money. There will be a cash shortage. The economy will plunge. But the economy has already plunged as a result of the measures and the over indictment (ph) they have.

STERNS: Marc, we also do have to ask you about this selloff we've seen in China. Initially today, at one point when the market opened the stock market of the Shanghai composite was up eight and nine percent. It's come off a little bit since then, but we are still about 30 percent off since Chinese equities peaked earlier in June, I believe June 12. What do think about the selloff in the Chinese market? How much further could we go? How much further into bear territory could Chinese equities move?

FABER: Well my view was that after this (INAUDIBLE) 100 percent increase in Chinese stocks and huge speculation, and huge speculation on margin, margin index in China, the percent of the economy, was almost twice as large as in the U.S. So it was very large. And my view was that the market would fall from the peak by at least 40 percent.

And I still maintain that -- that the market will move lower before it starts to move up again. But I don't think we'll see a new high in China for some time.

MILLER: Why? You mentioned the underlying economies there having real problems, or at least slowing down. How bad do you think that is, how significant?

FABER: I think the economy is very weak by Chinese growth standards. And we've seen that also in industrial commodity prices. I think lots of sectors in China are no longer growing. But you have to realize China is a country that has 1.3 billion people. You have lots of different provinces that are as large as a U.S. state. So you are going to have some provinces that are still growing and some sectors are still growing, and other sectors are contracting. But overall I think at the present, the Chinese economy, and (INAUDIBLE) on export figures, say from South Korea to China, from Taiwan to China, and (INAUDIBLE), at the present time I guess the maximum the Chinese economy is growing at is four percent, but that is the maximum.

STERNS: Four percent. All right, Marc, just a final quick question on the Fed, just everything that's happening in Greece right now, and perhaps what's also happening in the Chinese markets, does this all force Janet Yellen to delay a rate hike?

FABER: Well, as you know, the majority of Fed's governors that are voting are those that always they will use any excuse to essentially delay a rate increase. And the ECB will use the Greek situation most likely to print even more money. I don't believe that it will help the economy. Don't misunderstand me. But that's what I think they will do.

STERNS: All right, Marc Faber, thank you so much for joining us, Marc Faber joining us there by phone from Thailand.


**For more on Greece and the biggest news in financial markets, 'What'd You Miss?' featuring Joe Weisenthal and Alix Steel debuts today at 4:00 pm ET. Watch on Bloomberg Television or on livestream here:

Copyright © 2015 Bloomberg - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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