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“Every revolution evaporates and leaves behind only the slime of a new bureaucracy.”

-Franz Kafka

There may not be a better literary analogy for the situation in Greece than Kafka’s classic, The Castle.  The book was inspired by the actual bureaucracy of the Habsburg Empire, which Kafka was forced to deal with during his life.  (Having just had multiple visits to the Connecticut DMV, we can certainly empathize with Kafka’s experiences.)

In The Castle, the narrator, K, arrives in a village governed by a mysterious bureaucracy that is operating in a nearby castle.  In seeking shelter at the town’s inn, K claims to be a land surveyor summoned by the authorities in the castle.   Very quickly he is notified that the castle contact is an official named Klamm, who informs K in a note that he will report to the Council Chairman.

Subsequently, the Council Chairman informs K that due to bad communication between the castle and the village he was erroneously requested.  In lieu of this, the Council Chairman offers him a position to serve as a caretaker in service of the school teacher.  Despite this generous offer, K, still unfamiliar with the processes of the village, continues to try and reach Klamm, which is considered a major taboo by villagers.

The villagers hold the officials and the castle in the highest regard, despite not really understanding what it is they do.  In fact, the actions of the officials are never explained.  Despite this, the villagers often provide justifications for the officials’ actions through long monologues.   In fact, everyone seems to have an explanation for the officials’ actions, despite their contradictory nature and clear ambiguity.  The villagers actually praise this ambiguity as another compelling feature of the official!

Kafka is describing a society in which the bureaucracy has become predominant at the expense of practicality, efficiency and all else.   In the real world of course, the rapid growth of a bureaucracy is likely to stunt growth and innovation.   If Greece sounds like a case study of this, well it should.

The Castle - Greek iceberg cartoon 06.30.2015

Back to the Global Macro Grind...

Distinguished economist and market practitioner Daniel Lacalle wrote a very thoughtful piece on Greece as a special Hedgeye contributor this past weekend.  In the note (a must read), he touched on this very issue of bureaucracy.

According to Lacalle:

...The real drama is that none of the measures announced will solve Greece´s real issues. No, it´s not the euro, or the austerity plans. It´s not the cost or maturity of debt. Greece pays less than 2.6% of GDP in interest and has 16.5 years of average maturity in its bonds. In fact, Greece already enjoys much better debt terms than any sovereign re-structuring seen in recent history.


Greece´s problem is not one of solidarity either. Greece has received the equivalent of 214% of its GDP in aid from the Eurozone, ten times more, relative to gross domestic product, than Germany after the Second World War.


Greece´s challenge is and has always been one of competitiveness and bureaucratic impediments to create businesses and jobs.


Greece ranks number 81 in the Global  Competitiveness Index, compared to Spain (35), Portugal (36) or Italy (49). In fact it has the levels of competitiveness of Algeria or Iran, not of an OECD country.  On top of that, Greece has one of the worst fiscal systems and limits job creation with a combination of agressive taxation on SMEs and high bureaucracy. Greece ranks among the poorest countries of the OECD in ease of doing business (Doing Business, World Bank) at number 61, well below Spain, Italy or Portugal.


Between 1976 and 2012 the number of civil servants multiplied by three while the private sector workforce grew just 25%. This, added to more than 70 loss-making public companies and a government spend to GDP figure that stands at 59%, and has averaged 49% since 2004, is the real Greek drama, and one that will not be solved easily.”

Greece's structural problem is bureaucracy, which is, currently at least, being arbitrarily defended by its citizens, despite broad evidence of its inefficacy. You can request a replay of the conference call he held with Keith on Monday by emailing .

In the most recent news from the Eurozone, Greek PM Tsipras continues to do his best to emulate officials from The Castle.  In contrasts to all standards of logical reason, according to commentary in the WSJ this morning, his most recent letter to creditors appears to actually “increase the fiscal gap”.  Leave it to a bureaucrat to believe that when your country is in economic meltdown mode, the right move is to take steps backwards!

As emphasized in the cartoon in the middle of this note and the Chart of the Day, the bigger issue with Greece is that it has the potential to be the tip of the iceberg in Europe.  If history over the past decade tells us anything about Europe, it is that the area’s fiscal and competitive imbalances are contained, until they are not.

As an example, while Portugal’s deficit is fully funded for 2015, its longer term fiscal metrics remain disconcerting.  With a public debt-as-percentage-of-GDP at 130% and a deficit-as-a-%-of-GDP still running at 4 – 5%, is far from out of the woods.  Certainly, the country, as evidenced this year, can fund via debt when times are good, but in deeper recessionary scenario when the deficit naturally broadens, that debt loan will likely give creditors pause.

Luckily for me, I’m back home celebrating Canada Day and shielded, at least for a day or two, from the dysfunction from the Eurozone.  Although in Canada, there is this little thing called a housing bubble to consider...

Our immediate-term Global Macro Risk Ranges are now:

UST 10yr Yield 2.19-2.49%

SPX 2052-2093 
Nikkei 19
VIX 14.21-19.01
USD 94.01-96.41 
Oil (WTI) 57.80-61.20

Keep your head up and stick on the ice,

Daryl G. Jones

Director of Research

The Castle - COD z EL. yields