Tuesday 7 February 2012

Greek Tradegy edges towards the worst solution

Have the Germans and International Troika have woken up the the Greek menace and have decided to play hardball?

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.


Barnacle Bill said...

I fear it may come to this as the politicians in the countries being forced to take the harsh medicine are showing a decidely yellow streak when it comes to confront the sheeple.
Who in turn are beginning to sense they might prevail.
Of course no-one will win but we might just be witnessing a European Spring.

Anonymous said...

Hi there- a regular reader here. i enjoy your posts, but would respectfully point you towards a zerohedge article on this topic:
The Euro priced bonds are still for the most part governed under Greek law, so internal damage could be mitigated in the event of a Euro withdrawal. This might change with any future "bailout".

Anonymous said...

It is quite astonishing that the Greeks continue to play this silly game when they are holding all the cards. Defaulting is the obvious course for them as the ECB is holding all the debt at punitive rates and refuses to write any of it off. Maybe they have grasped this and are only trying to give the impression of complying when they know they cannot do so.

Of course the Greeks are already paying a heavy price for taking out so much debt. The Germans and the French also need to pay the price for lending so recklessly. So far the French and Germans have avoided paying for their reckless lending, and will only do so when Greece et al do indeed default.

Budgie said...

Good analysis, CU. There is no advantage in Greece leaving the euro, and the Greek people do not want to. This will all play out within the eurozone.

The real problem was the West convinced itself that borrowing was "investment". The eurozone, the UK and the US are broke. Only time will heal, and then only if we stop overspending; and especially stop kidding ourselves.

hovis said...

Barnacle Bill: I think you are viewing the situation through a prism of anglecism, Greece has differenet underlying dynamics.

Anon: I agree with much of what you say - they need to and should default 100%. The one thing we often forget here in the UK is that the politico's are truly divorced from the populous, ( even more so than here) in their love for EU and teh Euro. SO any change to the situatin would really require a coup.

Budgie: Of friend and family there I am getting mixed messages but even with the bilge on local media there is far from any unanimity that Greece should stay in the Euro, no matter what the press tell you.

andrew said...

as poster above pointed out, the zerohedge article is interesting.
basically if they do default, and leave the euro, if the govt ever sends any money abroad, chances are a bond holder will sue. they will be cut off from the rotw.
how do you defend cyprus if you cannot buy bullets or petrol?
wars start from this.
on the other hand, we may end up with the rbs owning a large lump of minos. this minor tear in the fabric of the eu is as good as it gets.

hovis said...

Andrew, I hear what you are saying but the pedant in me has to point out Cyprus whilst a basket case, (and full of Russian Mafia money) is a totally independent from Greece, so despite cultural ties they'll be the one's having to defend themselves.

James Higham said...

Perhaps there is a grasp in the recesses of the mind but they can't admit reality because of the indicated action required.

CityUnslicker said...

Anon - read the article. the internal damage will be huge to Greek companies - not the state, the state will be fine. Problem is all their taxes will dry up as companies with Euro debt go under - Companies don't have these handy get out of jail free Soveriegn default laws.

When the Greeks have no tax, the Government will need to take on debt - which only could come from the EU.

BlackRaven said...

Greece will stop running a primary budget deficit this year. At that point it will selectively default, and there will be nothing the Germans can do about it.

I am amazed their taxpayers are sanguine about this backdoor transfer.

Hopper said...

Good article: the only bit I'd take issue with:
"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 Eurozone politicos have spent three years doing absolutely everything *except* "getting on with it"; I think it unlikely they're going to change tack now. Procrastination, thy names are Merkel, Sarkozy, von Rompuy, Barroso, ...

formertory said...

@ budgie: The real problem was the West convinced itself that borrowing was "investment".

God, yes, nailed it in one. And still it's done at local, national and international level. Not an evening goes by when there aren't reports of "investment" in this, that, and the damn other. It seems there are two major educational gaps in politicians and journos - first, the relative meanings of "investment" and "cost", and second, the works of Frederic Bastiat.

Hang 'em all!

Anonymous said...

Hovis: "there is far from any unanimity that Greece should stay in the Euro, no matter what the press tell you."

I think we would all do well to be aware of that. It is pretty clear that news of what is actually going on in Greece seems to be stifled for some reason. Clearly this favours the EU/ECB/Merkozy triangle and its acolytes because they don't want the rest of us to know that they are causing a third-world style catastrophe in Greece in order to save their own skins.

It has also become pretty clear that the newspapers that like to claim they are "anti-EU" like the Mail and the Sun have been stifling stories that they could actually use to stick the knife in - they haven't been as vocal in their condemnation of the "United-States of Europe" strategy of Merkel as the Telegraph, and have gone quiet on this kind of thing. They prefer to talk BS about straight bananas and avoid the meat.