Tuesday 7 February 2012
Greek Tradegy edges towards the worst solution
Their policy of debt forgiveness with enforced price changes through massive deflation in Greece has long been their desired prescription. Now is not the time to be starting to worry about whether imposing a further 5 year recession is sensible, now is the time to impose whilst the bargaingin position is percevied as strong.
However, the Greek Government can sense that its unions and people are not at one with this idea of an externally imposed, high level of austerity - much easier to forget who ran the debt up and adjusted lifestyles to Northern European levels with Southern European productivity and complain about perfidious foreigners.
Thus now a stand-off has been reached - The Euro Countries wanting to see real action on austerity and not just words, the Greeks not happy to have been found out about their casual lying to achieve what they want; but still not politically able to take the foul medicien prescribed.
Of course, this may lead to the worst overall outcome for Greece. There is no desire to leave the euro and no way for the Greeks to be kicked out. Indeed, with debts in euro's and a currency in drachma a huge swathe of Greek business would be bust in days, even after the Sovereign default - a bad outcome for Greece but it would be a lesson to others. So, now we have the concept of a default inside the Eurozone as a real possibility.
Say Greece halves its debt to 80% via a default and stays in the Euro.Euro area banks in France are ruined and the ECB may also be insolvent, so now we have a renewed Eurozone banking crisis. In Greece, the economic collapse continues as the currency is still too strong to build an economy - those tourists still can't afford their holidays in Euro prices. Plus of course with no way of getting external debt, Greece will be dependent on the ECB for funding - so the austerity strings will not be detached and the economy will be ground down to its smaller more productive state that the Germans so desperately want.
The reason this is the worst result is that we get a nice Eurozone banking crisis and Greece continues as a basket case....with another default in 2/3 years quite likely as debts outgrow a recessionary economy. Also Portugal will watch and see that it may as well default anyway as the benefits of not defaulting are Eurozone imposed austerity which is the price of defaulting too - so they may as well get on with it.
The logic of the above is compelling and shows how removed from logic politicians become when dealing with events - there seems to be no grasp of this by either side in the negotiations, all is instead lost in the moment. Hopefully it won't come to this.
Posted by CityUnslicker